Securities
registered or to be registered pursuant to Section 12(b) of the
Act.

Title
of each class

Name
of each exchange on which registered

Common
Stock, par value of $0.001 per share

New
York Stock Exchange

Securities
registered or to be registered pursuant to Section 12(g) of the
Act.

None

Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act.

None

Indicate
the number of outstanding shares of each of the issuer's classes of capital
or
common stock as of the close of the period covered by the annual
report.

72,831,823
shares of Common Stock, par value of $0.001 per share.

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.

Yes
[ X ]
No [ ]

If
this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of
the Securities Exchange Act of 1934.

Yes
[ ]
No [X]

1

Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.

Yes
[X]
No [ ]

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):

Indicate
by check mark which financial statement item the registrant has elected to
follow:

Item
17 [
] Item 18 [X]

If
this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).

Yes
[ ]
No [X]

2

TEEKAY
SHIPPING CORPORATION

INDEX
TO REPORT ON FORM 20-F

Page

PART
I.

Item
1.

Identity
of Directors, Senior Management and Advisors

Not
applicable

Item
2.

Offer
Statistics and Expected Timetable

Not
applicable

Item
3.

Key
Information

5

Item
4.

Information
on the Company

12

Item
4A.

Unresolved
Staff Comments

Not
applicable

Item
5.

Operating
and Financial Review and Prospects

25

Item
6.

Directors,
Senior Management and Employees

44

Item
7.

Major
Shareholders and Related Party Transactions

48

Item
8.

Financial
Information

49

Item
9.

The
Offer and Listing

50

Item
10.

Additional
Information

50

Item
11.

Quantitative
and Qualitative Disclosures About Market Risk

51

Item
12.

Description
of Securities Other than Equity Securities

Not
applicable

PART
II.

Item
13.

Defaults,
Dividend Arrearages and Delinquencies

53

Item
14.

Material
Modifications to the Rights of Security Holders and Use of
Proceeds

53

Item
15.

Controls
and Procedures

53

Item
16A.

Audit
Committee Financial Expert

54

Item
16B.

Code
of Ethics

54

Item
16C.

Principal
Accountant Fees and Services

54

Item
16D.

Exemptions
from the Listing Standards for Audit Committees

55

Item
16E.

Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers

55

PART
III.

Item
17.

Financial
Statements

Not
applicable

Item
18.

Financial
Statements

55

Item
19.

Exhibits

56

Signature

57

3

PART
I

This
Annual Report should be read in conjunction with the consolidated financial
statements and accompanying notes included in this report.

In
addition to historical information, this Annual Report contains forward-looking
statements that involve risks and uncertainties. Such forward-looking statements
relate to future events and our operations, objectives, expectations,
performance, financial condition and intentions. When used in this Annual
Report, the words "expect," "intend," "plan," "believe," "anticipate,"
"estimate" and variations of such words and similar expressions are intended
to
identify forward-looking statements. Forward-looking statements in this Annual
Report include, in particular, statements regarding:

·

our
future growth prospects;

·

tanker
market fundamentals, including the balance of supply and
demand in the
tanker market, spot tanker charter rates, OPEC and non-OPEC
oil
production;

·

expected
demand in the offshore oil production sector and the
demand for
vessels;

·

future
capital expenditure commitments and the financing
requirements for such
commitments;

·

delivery
dates of and financing for newbuildings, and
the commencement of service
of newbuildings under long-term time charter
contacts;

·

future
cash flow from vessel operations and strategic
position;

·

the
growth prospects of the LNG shipping
sector and including increased
competition;

·

the
expected impact of International
Maritime Organization and other
regulations, as well as our expected
compliance with such regulations;

·

the
expected lifespan of our vessels;

·

the
expected impact of heightened
environmental and quality
concerns of
insurance underwriters, regulators
and charterers;

·

the
growth of the global
economy and global oil
demand;
and

·

our
intention to
create
a new publicly-listed
entity for our
conventional
tanker
business;

·

our
pending acquisition
of 50 percent of
OMI Corporation;
and

·

our
exemption to tax
on our U.S. Source international
transportation
income.

Forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance or achievements, and
may
contain the words believe, anticipate, expect, estimate, project, will be,
will
continue, will likely result, or words or phrases of similar meanings. These
statements involve known and unknown risks and are based upon a number of
assumptions and estimates that are inherently subject to significant
uncertainties and contingencies, many of which are beyond our control. Actual
results may differ materially from those expressed or implied by such
forward-looking statements. Important factors that could cause actual results
to
differ materially include, but are not limited to: changes in production of
or
demand for oil, petroleum products and LNG, either generally or in particular
regions; greater or less than anticipated levels of tanker newbuilding orders
or
greater or less than anticipated rates of tanker scrapping; changes in trading
patterns significantly impacting overall tanker tonnage requirements; changes
in
applicable industry laws and regulations, and the timing of implementation
of
new laws and regulations; changes in typical seasonal variations in tanker
charter rates; changes in the offshore production of oil or demand for shuttle
tankers, FSOs and FPSOs; the potential for early termination of long-term
contracts and our inability to renew or replace long-term contracts; changes
affecting the offshore tanker market; conditions in the United States capital
markets, particularly those affecting valuations of master limited partnerships;
shipyard production delays; the cyclical nature of the tanker industry and
our
dependence on oil markets; competitive factors in the markets in which we
operate; and other factors detailed from time to time in our periodic
reports.

Forward-looking
statements in this Annual Report are necessarily estimates reflecting the
judgment of senior management and involve known and unknown risks and
uncertainties. These forward-looking statements are based upon a number of
assumptions and estimates that are inherently subject to significant
uncertainties and contingencies, many of which are beyond our control. Actual
results may differ materially from those expressed or implied by such
forward-looking statements. Accordingly, these forward-looking statements
should, be considered in light of various important factors, including those
set
forth in this Annual Report under Item 3. Key Information - "Risk Factors".

We
do
not intend to revise any forward-looking statements in order to reflect any
change in our expectations or events or circumstances that may subsequently
arise. You should carefully review and consider the various disclosures included
in this Annual Report and in our other filings made with the SEC that attempt
to
advise interested parties of the risks and factors that may affect our business,
prospects and results of operations.

Item
1. Identity of Directors, Senior Management and Advisors

Not
applicable.

4

Item
2. Offer Statistics and Expected Timetable

Not
applicable.

Item
3. Key Information

Selected
Financial Data

Set
forth
below is selected consolidated financial and other data of Teekay Shipping
Corporation together with its subsidiaries (sometimes referred to as "Teekay,"
the "Company," “we” or “us”), for 2006, 2005, 2004, 2003 and 2002, which have
been derived from our consolidated financial statements. The data below should
be read in conjunction with the consolidated financial statements and the notes
thereto and the Report of Independent Registered Public Accounting Firm therein,
with respect to the consolidated financial statements for 2006, 2005 and 2004,
and "Item 5. Operating and Financial Review and Prospects," included herein.

Total
operating expenses includes writedown / (gain) loss on sale of vessels
and
equipment, and restructuring charges as
follows:

2006

2005

2004

2003

2002

(in
thousands)

Writedown
/ (gain) on sale of vessels and
equipment

$

(1,341

)

$

(139,184

)

$

(79,254

)

$

90,389

$

-

Restructuring
charges

8,929

2,882

1,002

6,383

-

7,588

(136,302

)

(78,252

)

96,772

-

(2)

On
May 17, 2004, we effected a two-for-one stock split relating to our
common
stock. All relevant per share data and number of outstanding shares
of
common stock give effect to this stock split
retroactively.

(3)

Consistent
with general practice in the shipping industry, we use net revenues
(defined as revenues less voyage expenses) as a measure of equating
revenues generated from voyage charters to revenues generated from
time
charters, which assists us in making operating decisions about the
deployment of our vessels and their performance. Under time charters
the
charterer pays the voyage expenses, whereas under voyage charter
contracts
the ship-owner pays these expenses. Some voyage expenses are fixed,
and
the remainder can be estimated. If we, as the ship owner, pay the
voyage
expenses, we typically pass the approximate amount of these expenses
on to
our customers by charging higher rates under the contract or billing
the
expenses to them. As a result, although revenues from different types
of
contracts may vary, the net revenues after subtracting voyage expenses,
which we call “net revenues,” are comparable across the different

5

types
of contracts. We principally use net revenues, a non-GAAP financial
measure, because it provides more meaningful information to us
than
revenues, the most directly comparable GAAP financial measure.
Net
revenues are also widely used by investors and analysts in the
shipping
industry for comparing financial performance between companies
and to
industry averages. The following table reconciles net revenues
with
revenues.

2006

2005

2004

2003

2002

(in
thousands)

Revenues

$

2,013,306

$

1,954,618

$

2,219,238

$

1,576,095

$

783,327

Voyage
expenses

(522,117

)

(419,169

)

(432,395

)

(394,656

)

(239,455

)

Net
revenues

1,491,189

1,535,449

1,786,843

1,181,439

543,872

(4)

Total
capitalization represents total debt, minority interest and total
stockholders' equity.

(5)

Until
ended February 16, 2006, we had $143.7 million of Premium Equity
Participating Security Units due May 18, 2006 (or Equity
Units)
outstanding. If these Equity Units were presented as equity, our
total
debt to total capitalization would have been 46.2% as of December
31, 2005
(December 31, 2004 - 52.1% and December 31, 2003 - 45.2%) and our
net debt
to total capitalization would have been 39.5% as of December 31,
2005
(December 31, 2004 - 41.9% and December 31, 2003 - 39.8%). We believe
that
this presentation as equity for the purposes of these calculations
is
consistent with the requirement of each Equity Unit holder to purchase
for
$25 a specified fraction of a share of our common stock on February
16,
2006. Please read Item 18 - Financial Statements: Note 9 - Long-Term
Debt.

The
cyclical nature of the tanker industry causes volatility in our
profitability.

Historically,
the tanker industry has been cyclical, experiencing volatility in profitability
due to changes in the supply of, and demand for, tanker capacity. Increases
or
decreases in the supply of tankers could have a material adverse effect on
our
business, financial condition and results of operations, particularly with
respect to our spot tanker segment, which accounted for approximately 42% and
51% of our net revenues during 2006 and 2005, respectively. The cyclical nature
of the tanker industry may cause significant increases or decreases in the
revenue we earn from our vessels and may also cause significant increases or
decreases in the value of our vessels. The supply of tanker capacity is
influenced by the number and size of new vessels built, vessels scrapped,
converted and lost, the number of vessels that are out of service and
regulations that may effectively cause early obsolescence of tonnage. The demand
for tanker capacity is influenced by, among other factors: global and regional
economic conditions; increases and decreases in production of and demand for
crude oil and petroleum products; increases and decreases in OPEC oil production
quotas; the distance crude oil and petroleum products need to be transported
by
sea; and developments in international trade and changes in seaborne and other
transportation patterns.

Because
many of the factors influencing the supply of and demand for tanker capacity
are
unpredictable, the nature, timing and degree of changes in tanker industry
conditions are also unpredictable.

We
depend upon oil markets, changes in which could result in decreased demand
for
our vessels and services.

Demand
for our vessels and services in transporting crude oil and petroleum products
depends upon world and regional oil markets. Any decrease in shipments of crude
oil and petroleum products in those markets could have a material adverse effect
on our business, financial condition and results of operations.Historically,
those markets have been volatile as a result of the many conditions and events
that affect the price, production and transport of oil and petroleum products,
as well as competition from alternative energy sources. A slowdown of the United
States and world economies may result in reduced consumption of crude oil and
petroleum products and a decreased demand for our vessels and services.

Terrorist
attacks, increased hostilities or war could lead to further economic
instability, increased costs and disruption of our
business.

Terrorist
attacks and war may adversely affect our business, operating results, financial
condition, ability to raise capital or future growth. Continuing hostilities
in
the Middle East may lead to additional armed conflicts or to further acts of
terrorism and civil disturbance in the United States or elsewhere, which may
contribute further to economic instability and disruption of oil and LNG
production and distribution, which could result in reduced demand for our
services. In addition, oil and LNG facilities, shipyards, vessels, pipelines
and
oil and gas fields could be targets of future terrorist attacks. Any such
attacks could lead to, among other things, bodily injury or loss of life, vessel
or other property damage, increased vessel operational costs, including
insurance costs, and the inability to transport oil and LNG to or from certain
locations. Terrorist attacks, war or other events beyond our control that
adversely affect the distribution, production or transportation of oil or LNG
to
be shipped by us could entitle our customers to terminate charter contracts,
which could harm our cash flow and our business.

Our
substantial operations outside the United States expose us to political,
governmental and economic instability, which could harm our
operations.

Because
our operations are primarily conducted outside of the United States, they may
be
affected by economic, political and governmental conditions in the countries
where we are engaged in business or where our vessels are registered. Any
disruption caused by these factors could harm our business. In particular,
changing laws and policies affecting trade, investment and changes in tax
regulations could have a materially adverse effect on our business, cash flow
and financial results. As well, we derive a substantial portion of our revenues
from shipping oil and LNG

6

from
politically unstable regions. Past political conflicts in these regions,
particularly in the Arabian Gulf, have included attacks on ships, mining of
waterways and other efforts to disrupt shipping in the area. In addition to
acts
of terrorism, vessels trading in this and other regions have also been subject,
in limited circumstances, to piracy. Future hostilities or other political
instability in the Arabian Gulf or other regions where we operate or may operate
could have a material adverse effect on the growth of our business, results
of
operations and financial condition. In addition, tariffs, trade
embargoes and other economic sanctions by Spain, the United States or other
countries against countries in the Middle East, Southeast Asia or elsewhere
as a
result of terrorist attacks, hostilities or otherwise may limit trading
activities with those countries, which could also harm our business.Finally,
a government could requisition one or more of our vessels, which is most likely
during war or national emergency. Any such requisition would cause a loss of
the
vessel and could harm our business, cash flow and financial
results.

Our
dependence on spot voyages may result in significant fluctuations in the
utilization of our vessels and our profitability.

During
2006 and 2005, we derived approximately 42% and 51%, respectively, of our net
revenues from the vessels in our spot tanker segment. Our spot tanker segment
consists of conventional crude oil tankers and product carriers operating on
the
spot market or subject to time charters or contracts of affreightment priced
on
a spot-market basis or short-term fixed-rate contracts. We consider contracts
that have an original term of less than three years in duration to be
short-term. Part of our conventional Aframax and Suezmax tanker fleets and
our
large and small product tanker fleets are among the vessels included in our
spot
tanker segment. Our shuttle tankers may also trade in the spot market when
not
otherwise committed to perform under time charters or contracts of
affreightment. Due to our dependence on the spot charter market, declining
charter rates in a given period generally will result in corresponding declines
in operating results for that period. The spot charter market is highly
competitive and spot charter rates are subject to significant fluctuations
based
on tanker and oil supply and demand. Charter rates have varied significantly
in
the last few years. Future spot charters may not be available at rates that
will
be sufficient to enable our vessels to be operated profitably or to provide
sufficient cash flow to service our debt obligations.

Reduction
in oil produced from offshore oil fields could harm our shuttle tanker and
FPSO
business.

As
at
December 31, 2006, we had 42 vessels (including 12 chartered-in vessels) in
our
shuttle tanker fleet and four FPSO units.A
majority of our shuttle tankers and all of our FPSOs earn revenue that depends
upon the volume of oil we transport or the volume of oil produced from offshore
oil fields. Oil production levels are affected by several factors, all of which
are beyond our control, including:

·

geologic
factors, including general declines in production that occur naturally
over time;

·

the
rate of technical developments in extracting oil and related
infrastructure and implementation costs; and

·

operator
decisions based on revenue compared to costs from continued operations.

Factors
that may affect an operator’s decision to initiate or continue production
include: changes in oil prices; capital budget limitations; the availability
of
necessary drilling and other governmental permits; the availability of qualified
personnel and equipment; the quality of drilling prospects in the area; and
regulatory changes. In addition, the volume of oil we transport may be adversely
affected by extended repairs to oil field installations or suspensions of field
operations as a result of oil spills, operational difficulties, strikes,
employee lockouts or other labor unrest. The rate of oil production at fields
we
service may decline from existing or future levels, and may be terminated.
If
such a reduction or termination occurs, the spot market rates, if any, in the
conventional oil tanker trades at which we may be able to redeploy the affected
shuttle tankers may be lower than the rates previously earned by the vessels
under the contracts of affreightment, which would adversely affect our business
and operating results.

The
duration of many of our shuttle tanker and FSO contracts is the life of the
relevant oil field or is subject to extension by the field operator or vessel
charterer. If the oil field no longer produces oil or is abandoned or the
contract term is not extended, we will no longer generate revenue under the
related contract and will need to seek to redeploy affected
vessels.

Many
of
our shuttle tanker contracts have a “life-of-field” duration, which means that
the contract continues until oil production at the field ceases. If production
terminates for any reason, we no longer will generate revenue under the related
contract. Other shuttle tanker and FSO contracts under which our vessels operate
are subject to extensions beyond their initial term. The likelihood of these
contracts being extended may be negatively affected by reductions in oil field
reserves, low oil prices generally or other factors. If we are unable to
promptly redeploy any affected vessels at rates at least equal to those under
the contracts, if at all, our operating results will be harmed. Any potential
redeployment may not be under long-term contracts, which may affect the
stability of our business and operating results.

The
redeployment risk of FPSO units is high given their lack of alternative uses
and
significant costs.

FPSO
units are specialized vessels that have very limited alternative uses and high
fixed costs. In addition, FPSO units typically require substantial capital
investments prior to being redeployed to a new field and production service
agreement. Unless extended, each of our FPSO production service agreements
will
expire during the next 10 years. Our clients may also terminate these contracts
prior to their expiration under specified circumstances. Any idle time prior
to
the commencement of a new contract or our inability to redeploy the vessels
at
acceptable rates may have an adverse affect on our business and operating
results.

Over
time, vessel values may fluctuate substantially and, if these values are lower
at a time when we are attempting to dispose of a vessel, we may incur a
loss.

Vessel
values for oil tankers, LNG carriers and FPSO units can fluctuate substantially
over time due to a number of different factors, including:

a
substantial or extended decline in demand for oil, natural gas or,
LNG;

·

increases
in the supply of vessel capacity,
and

7

·

the
cost of retrofitting or modifying existing vessels, as a result of
technological advances in vessel design or equipment, changes in
applicable environmental or other regulation or standards, or
otherwise.

If
a
charter terminates, we may be unable to re-deploy the vessel at attractive
rates
and, rather than continue to incur costs to maintain and finance it, may seek
to
dispose of it. Our inability to dispose of the vessel at a reasonable value
could result in a loss on its sale and adversely affect our results of
operations and financial condition.

Our
growth depends on continued growth in demand for LNG and LNG shipping as well
as
offshore oil transportation, production, processing and storage
services.

A
significant portion of our growth strategy focuses on continued expansion in
the
LNG shipping sector and on the expansion in the shuttle tanker, FSO and FPSO
sectors.

Expansion
of the LNG shipping sector depends on continued growth in world and regional
demand for LNG and LNG shipping and the supply of LNG. Demand for LNG and LNG
shipping could be negatively affected by a number of factors, such as increases
in the costs of natural gas derived from LNG relative to the cost of natural
gas
generally, increases in the production of natural gas in areas linked by
pipelines to consuming areas, increases in the price of LNG relative to other
energy sources, the availability of new energy sources, and negative global
or
regional economic or political conditions. Reduced demand for LNG and LNG
shipping would have a material adverse effect on future growth of our liquefied
gas segment, and could harm that segment’s results. Growth of the LNG market may
be limited by infrastructure constraints and community and environmental group
resistance to new LNG infrastructure over concerns about the environment, safety
and terrorism. If the LNG supply chain is disrupted or does not continue to
grow, or if a significant LNG explosion, spill or similar incident occurs,
it
could have a material adverse effect on our business, results of operations
and
financial condition.

Expansion
of the shuttle tanker, FSO and FPSO sectors
depends
on continued growth in world and regional demand for these offshore services,
which could be negatively affected by a number of factors, such as:

·

decreases
in the actual or projected price of oil, which could lead to a reduction
in or termination of production of oil at certain fields we service
or a
reduction in exploration for or development of new offshore oil
fields;

·

increases
in the production of oil in areas linked by pipelines to consuming
areas,
the extension of existing, or the development of new, pipeline systems
in
markets we may serve, or the conversion of existing non-oil pipelines
to
oil pipelines in those markets;

·

decreases
in the consumption of oil due to increases in its price relative
to other
energy sources, other factors making consumption of oil less attractive
or
energy conservation measures;

·

availability
of new, alternative energy
sources; and

·

negative
global or regional economic or political conditions, particularly
in oil
consuming regions, which could reduce energy consumption or its
growth.

Reduced
demand for offshore marine transportation, production, processing or storage
services would have a material adverse effect on our future growth and could
harm our business, results of operations and financial condition.

The
intense competition in our markets may lead to reduced profitability or
expansion opportunities.

Our
crude
oil and product tankers and LNG carriers operate in highly competitive markets.
Competition arises primarily from other Aframax, Suezmax, shuttle tanker and
LNG
carrier owners, including major oil companies and independent companies. We
also
compete with owners of other size tankers. Our market share is insufficient
to
enforce any degree of pricing discipline in the markets in which we operate
and
our competitive position may erode in the future. Any new markets that we enter
could include participants that have greater financial strength and capital
resources than we have. We may not be successful in entering new markets.

One
of
our objectives is to enter into additional long-term, fixed-rate time charters
for our LNG carriers, shuttle tankers, FSO and FPSO units. The process of
obtaining new long-term time charters is highly competitive and generally
involves an intensive screening process and competitive bids, and often extends
for several months. We expect substantial competition for providing services
for
potential LNG, shuttle tanker, FSO and FPSO projects from a number of
experienced companies, including state-sponsored entities and major energy
companies. Many of these competitors have greater experience in these markets
and significantly greater financial resources than do we. We anticipate that
an
increasing number of marine transportation companies, including many with strong
reputations and extensive resources and experience will enter the LNG
transportation, FSO and FPSO sectors. This increased competition may cause
greater price competition for time charters. As a result of these factors,
we
may be unable to expand our relationships with existing customers or to obtain
new customers on a profitable basis, if at all, which would have a material
adverse effect on our business, results of operations and financial
condition.

The
loss of any key customer could result in a significant loss of revenue in a
given period.

We
have
derived, and believe that we will continue to derive, a significant portion
of
our revenues from a limited number of customers. One customer accounted for
15%,
or $307.9 million, of our consolidated revenues during 2006 (20% or $392.2
million - 2005 and 17% or $373.7 million - 2004). The loss of any significant
customer or a substantial decline in the amount of services requested by a
significant customer could have a material adverse effect on our business,
financial condition and results of operations.

Our
substantial debt levels may limit our flexibility in obtaining additional
financing and in pursuing other business opportunities

As
of
December 31, 2006, our consolidated debt and capital lease obligations totaled
$3.7 billion and we had the capacity to borrow an additional
$1.6 billion under our credit facilities. These facilities may be used by
us for general corporate purposes. Our consolidated debt and capital lease
obligations could increase substantially. We will continue to have the ability
to incur additional debt, subject to limitations in our credit facilities.
Our
level of debt could have important consequences to us, including the
following:

8

·

our
ability to obtain additional financing, if necessary, for working
capital,
capital expenditures, acquisitions or other purposes may be impaired
or
such financing may not be available on favorable
terms;

·

we
will need a substantial portion of our cash flow to make principal
and
interest payments on our debt, reducing the funds that would otherwise
be
available for operations, future business opportunities and distributions
to stockholders;

·

our
debt level will make us more vulnerable than our competitors with
less
debt to competitive pressures or a downturn in our business or the
economy
generally; and

·

our
debt level may limit our flexibility in responding to changing business
and economic conditions.

Our
ability to service our debt will depend upon, among other things, our future
financial and operating performance, which will be affected by prevailing
economic conditions and financial, business, regulatory and other factors,
some
of which are beyond our control. If our operating results are not sufficient
to
service our current or future indebtedness, we will be forced to take actions
such as reducing distributions, reducing or delaying our business activities,
acquisitions, investments or capital expenditures, selling assets, restructuring
or refinancing our debt, or seeking additional equity capital or bankruptcy
protection. We may not be able to affect any of these remedies on satisfactory
terms, or at all.

The
oil tanker and LNG carrier industries are subject to substantial environmental
and other regulations, which may significantly increase our
expenses.

Our
operations are affected by extensive and changing environmental protection
laws
and other regulations and international conventions. We have incurred, and
expect to continue to incur, substantial expenses in complying with these laws
and regulations, including expenses for vessel modifications and changes in
operating procedures. Additional laws and regulations may be adopted that could
limit our ability to do business or further increase our costs. In addition,
failure to comply with applicable laws and regulations may result in
administrative and civil penalties, criminal sanctions or the suspension or
termination of our operations.

The
United States Oil Pollution Act of 1990 (or OPA 90),
for
instance, increased expenses for us and others in our industry. OPA 90
provides for potentially unlimited joint, several and strict liability for
owners, operators and demise or bareboat charterers for oil pollution and
related damages in U.S. waters, which include the U.S. territorial sea
and the 200-nautical mile exclusive economic zone around the United States.
OPA 90 applies to discharges of any oil from a vessel, including discharges
of oil tanker cargoes and discharges of fuel and lubricants from an oil tanker
or LNG carrier. To comply with OPA 90, vessel owners generally incur
increased costs in meeting additional maintenance and inspection requirements,
in developing contingency arrangements for potential spills and in obtaining
required insurance coverage. OPA 90 requires vessel owners and operators of
vessels operating in U.S. waters to establish and maintain with the
U.S. Coast Guard evidence of insurance or of qualification as a
self-insurer or other acceptable evidence of financial responsibility sufficient
to meet certain potential liabilities under OPA 90 and the
U.S. Comprehensive Environmental Response, Compensation, and Liability Act
(or CERCLA),
which
imposes similar liabilities upon owners, operators and bareboat charterers
of
vessels from which a discharge of “hazardous substances” (other than oil)
occurs. While LNG should not be considered a hazardous substance under CERCLA,
additives to fuel oil or lubricants used on LNG carriers might fall within
its
scope. Under OPA 90 and CERCLA, owners, operators and bareboat charterers are
jointly, severally and strictly liable for costs of cleanup and damages
resulting from a discharge or threatened discharge within U.S. waters. This
means we may be subject to liability even if we are not negligent or at fault.

Most
states in the United States bordering on a navigable waterway have enacted
legislation providing for potentially unlimited strict liability without regard
to fault for the discharge of pollutants within their waters. An oil spill
or
other event could result in significant liability, including fines, penalties,
criminal liability and costs for natural resource damages. The potential for
these releases could increase to the extent we increase our operations in
U.S. waters.

OPA
90
and CERCLA do not preclude claimants from seeking damages for the discharge
of
oil and hazardous substances under other applicable law, including maritime
tort
law. Such claims could include attempts to characterize seaborne transportation
of LNG as an ultra-hazardous activity, which attempts, if successful, would
lead
to our being strictly liable for damages resulting from that activity.

Following
the example of OPA 90, the International Maritime Organization (or IMO),
the
United Nations’ agency for maritime safety, has adopted regulations for tanker
design and inspection that are designed to reduce oil pollution in international
waters. In December 2003 the IMO announced regulations accelerating the phase
out of single-hull tankers. The regulations impose a more rigorous inspection
regime for older tankers and ban the carriage of heavy oils on single-hull
tankers. We have sold all of our vessels affected by these regulations. Please
read Item 4 - Information on the Company: Regulations.

In
addition to international regulations affecting oil tankers generally, countries
having jurisdiction over North Sea areas also impose regulatory requirements
applicable to operations in those areas. Operators of North Sea oil fields
impose further requirements. As a result, we must make significant expenditures
for sophisticated equipment, reporting and redundancy systems on its shuttle
tankers. Additional regulations and requirements may be adopted or imposed
that
could limit our ability to do business or further increase the cost of doing
business in the North Sea or other regions in which we operate or may operate
in
the future.

In
addition, we believe that the heightened environmental, quality and security
concerns of insurance underwriters, regulators and charterers will generally
lead to additional regulatory requirements, including enhanced risk assessment
and security requirements and greater inspection and safety requirements on
vessels.

We
may not be able to successfully integrate future
acquisitions.

A
principal component of our strategy is to continue to grow by expanding our
business both in the geographic areas and markets where we have historically
focused as well as into new geographic areas, market segments and services.
We
may not be successful in expanding our operations and any expansion may not
be
profitable. Our strategy of growth through acquisitions involves business risks
commonly encountered in acquisitions of companies, including:

·

interruption
of, or loss of momentum in, the activities of one or more of an acquired
company’s businesses and our businesses;

9

·

additional
demands on members of our senior management while integrating acquired
businesses, which would decrease the time they have to manage our
business, service existing customers and attract new
customers;

·

difficulties
in integrating the operations, personnel and business culture of
acquired
companies;

adverse
effects on relationships with our existing suppliers and customers,
and
those of the companies acquired;

·

difficulties
entering geographic markets or new market segments in which we have
no or
limited experience; and

·

loss
of key officers and employees of acquired
companies.

Our
failure to effectively integrate businesses we may acquire in the future may
harm our business and results of operations.

We
may not realize expected benefits from acquisitions, and implementing our
strategy of growth through acquisitions may harm our financial condition and
performance.

Acquisitions
may not be profitable to us at the time of their completion and may not generate
revenues sufficient to justify our investment. In addition, our acquisition
growth strategy exposes us to risks that may harm our results of operations
and
financial condition, including risks that we may: fail to realize anticipated
benefits, such as cost-savings, revenue and cash flow enhancements and earnings
accretion; decrease our liquidity by using a significant portion of our
available cash or borrowing capacity to finance acquisitions; incur additional
indebtedness, which may result in significantly increased interest expense
or
financial leverage, or issue additional equity securities to finance
acquisitions, which may result in significant shareholder dilution; incur or
assume unanticipated liabilities, losses or costs associated with the business
acquired; or incur other significant charges, such as impairment of goodwill
or
other intangible assets, asset devaluation or restructuring
charges.

The
strain that growth places upon our systems and management resources may harm
our
business.

Our
growth has placed and will continue to place significant demands on our
management, operational and financial resources. As we expand our operations,
we
must effectively manage and monitor operations, control costs and maintain
quality and control in geographically dispersed markets. In addition, our two
limited partnership’s have increased our complexity and thus has placed
additional demands on our management. Our future growth and financial
performance will also depend on our ability to recruit, train, manage and
motivate our employees to support our expanded operations and continue to
improve our customer support, financial controls and information
systems.

These
efforts may not be successful and may not occur in a timely or efficient manner.
Failure to effectively manage our growth and the system and procedural
transitions required by expansion in a cost-effective manner could have a
material adverse affect on our business.

Our
insurance may not be sufficient to cover losses that may occur to our property
or as a result of our operations.

The
operation of oil tankers, LNG carriers, FSO and FPSO units is inherently risky.
Although we carry hull and machinery (marine and war risk) protection and
indemnity insurance, all risks may not be adequately insured against, and any
particular claim may not be paid. In addition, we do not generally carry
insurance on our vessels covering the loss of revenues resulting from vessel
off-hire time based on its cost compared to our off-hire experience. Any claims
covered by insurance would be subject to deductibles, and since it is possible
that a large number of claims may be brought, the aggregate amount of these
deductibles could be material. Certain of our insurance coverage is maintained
through mutual protection and indemnity associations, and as a member of such
associations we may be required to make additional payments over and above
budgeted premiums if member claims exceed association reserves.

We
may be
unable to procure adequate insurance coverage at commercially reasonable rates
in the future. For example, more stringent environmental regulations have led
in
the past to increased costs for, and in the future may result in the lack of
availability of, insurance against risks of environmental damage or pollution.
A
catastrophic oil spill or marine disaster could result in losses that exceed
our
insurance coverage, which could harm our business, financial condition and
operating results. Any uninsured or underinsured loss could harm our business
and financial condition. In addition, our insurance may be voidable by the
insurers as a result of certain of our actions, such as our ships failing to
maintain certification with applicable maritime self-regulatory
organizations.

Changes
in the insurance markets attributable to terrorist attacks may also make certain
types of insurance more difficult for us to obtain. In addition, the insurance
that may be available may be significantly more expensive than our existing
coverage.

Marine
transportation is inherently
risky, and an incident involving significant loss of or environmental
contamination by any of our vessels could harm our reputation and
business.

10

Our
vessels and their cargoes are at risk of being damaged or lost because of
events
such as:

·

marine
disasters;

·

bad
weather;

·

mechanical
failures;

·

grounding,
fire, explosions and collisions;

·

piracy;

·

human
error; and

·

war
and terrorism.

An
accident involving any of our vessels could result in any of the
following:

·

death
or injury to persons, loss of property or environmental damage or
pollution;

·

delays
in the delivery of cargo;

·

loss
of revenues from or termination of charter
contracts;

·

governmental
fines, penalties or restrictions on conducting
business;

·

higher
insurance rates; and

·

damage
to our reputation and customer relationships
generally.

Any
of
these results could have a material adverse effect on our business, financial
condition and operating results.

Our
operating results are subject to seasonal fluctuations.

We
operate our conventional tankers in markets that have historically exhibited
seasonal variations in demand and, therefore, in charter rates. This seasonality
may result in quarter-to-quarter volatility in our results of operations. Tanker
markets are typically stronger in the winter months as a result of increased
oil
consumption in the northern hemisphere. In addition, unpredictable weather
patterns in these months tend to disrupt vessel scheduling. The oil price
volatility resulting from these factors has historically led to increased oil
trading activities in the winter months. As a result, our revenues have
historically been weaker during the second and third quarters, and, conversely,
revenues have been stronger during the first and fourth quarters.

Due
to
harsh winter weather conditions, oil field operators in the North Sea typically
schedule oil platform and other infrastructure repairs and maintenance during
the summer months. Because the North Sea is our primary existing offshore oil
market, this seasonal repair and maintenance activity contributes to
quarter-to-quarter volatility in our results of operations, as oil production
typically is lower in the second and third quarters in this region compared
with
production in the first and fourth quarters. Because a significant portion
of
our North Sea shuttle tankers operate under contracts of affreightment, under
which revenue is based on the volume of oil transported, the results of these
shuttle tanker operations in the North Sea under these contracts generally
reflect this seasonal production pattern. When we redeploy affected shuttle
tankers as conventional oil tankers while platform maintenance and repairs
are
conducted, the overall financial results for our North Sea shuttle tanker
operations may be negatively affected as the rates in the conventional oil
tanker markets at times may be lower than contract of affreightment rates.
In
addition, we seek to coordinate some of the general drydocking schedule of
our
fleet with this seasonality, which may result in lower revenues and increased
drydocking expenses during the summer months.

We
expend substantial sums during construction of newbuildings and the conversion
of tankers to FPSOs or FSOs without earning revenue and without assurance that
they will be completed.

We
are
typically required to expend substantial sums as progress payments during
construction of a newbuilding, but we do not derive any revenue from the vessel
until after its delivery. In addition, under some of our time charters if our
delivery of a vessel to a customer is delayed, we may be required to pay
liquidated damages in amounts equal to or, under some charters, almost double
the hire rate during the delay. For prolonged delays, the customer may terminate
the time charter and, in addition to the resulting loss of revenues, we may
be
responsible for additional substantial liquidated charges.

If
we
were unable to obtain financing required to complete payments on any of our
newbuilding orders, we could effectively forfeit all or a portion of the
progress payments previously made. As of December 31, 2006, we had 26
newbuildings on order with deliveries scheduled between January 2007 and August
2009. As of December 31, 2006, progress payments made towards these
newbuildings, excluding payments made by our joint venture partners, totaled
$701.9 million. We ordered two shuttle tanker newbuildings in January 2007
and
expect to order additional newbuildings in the future.

In
addition, conversion projects expose us to a numbers of risks, including lack
of
shipyard capacity and the difficulty of completing the conversion in a timely
and cost effective manner. There can be no assurance that such conversion
projects will be successful.

Exposure
to currency exchange rate and interest rate fluctuations could result in
fluctuations in our cash flows and operating results.

Substantially
all of our revenues are earned in U.S. Dollars, although we are paid in Euros,
Australian Dollars, Norwegian Kroner and British Pounds under some of our
charters. A portion of our operating costs are incurred in currencies other
than
U.S. Dollars. This partial mismatch in operating revenues and expenses could
lead to fluctuations in net income due to changes in the value of the U.S.
dollar relative to other currencies, in particular the Norwegian Kroner,
the
Australian Dollar, the Canadian Dollar, the Singapore Dollar, the Japanese

11

Yen,
the
British Pound and the Euro. We also make payments under two Euro-denominated
term loans. If the amount of these and other Euro-denominated obligations
exceeds our
Euro-denominated revenues, we must convert other currencies, primarily the
U.S.
Dollar, into Euros. An increase in the strength of the Euro relative to the
U.S.
Dollar would require us to convert more U.S. Dollars to Euros to satisfy
those
obligations.

Because
we report our operating results in U.S. Dollars, changes in the value of the
U.S. Dollar relative to other currencies also result in fluctuations of our
reported revenues and earnings. Under U.S. accounting guidelines, all foreign
currency-denominated monetary assets and liabilities, such as cash and cash
equivalents, accounts receivable, restricted cash, accounts payable, long-term
debt and capital lease obligations, are revalued and reported based on the
prevailing exchange rate at the end of the period. This revaluation historically
has caused us to report significant non-monetary foreign currency exchange
gains
or losses each period. The primary source of these gains and losses is our
Euro-denominated term loans.

We
may not be exempt from United States tax on our United States source income,
which would reduce our net income and cash flow by the amount of the applicable
tax.

If
we are
not exempt from tax under Section 883 of the United States Internal Revenue
Code, the shipping income derived from the United States sources attributable
to
our subsidiaries' transportation of cargoes to or from the United States will
be
subject to U.S. federal income tax. If our subsidiaries were subject to such
tax, our net income and cash flow would be reduced by the amount of such tax.
Currently, we claim an exemption under Section 883. We cannot give any assurance
that future changes and shifts in ownership of our stock will not preclude
us
from being able to satisfy the existing exemption.

In
2006
and 2005, approximately 17.4% and 13.1%, respectively, of our gross shipping
revenues were derived from U.S. sources attributable to the transportation
of
cargoes to or from the United States. The average U.S. federal income tax on
such U.S. source income, in the absence of the exemption under Section 883,
would have been 4%, or approximately $7.0 million and $10.3 million,
respectively, for 2006 and 2005.

Many
seafaring employees are covered by collective bargaining agreements and the
failure to renew those agreements or any future labor agreements may disrupt
operations and adversely affect our cash flows.

A
significant portion of our seafarers are employed under collective bargaining
agreements. We may be subject to additional labor agreements in the future.
We
may be subject to labor disruptions if relationships deteriorate with the
seafarers or the unions that represent them. The collective bargaining
agreements may not prevent labor disruptions, particularly when the agreements
are being renegotiated. Salaries are typically renegotiated annually or
bi-annually for seafarers and annually for onshore operational staff. In certain
cases, these negotiations have caused labor disruptions in the past and any
future labor disruptions could harm our operations and could have a material
adverse effect on our business, results of operations and financial
condition.

Item
4. Information on the Company

A.
Overview, History and Development

Overview

We
are a
leading provider of international crude oil and petroleum product transportation
services with our offshore fleet, which includes the world's largest fleet
of
shuttle tankers, our fixed-rate tanker fleet, and our spot tanker fleet, which
includes the world's largest fleet of medium-size oil tankers. Since 2004,
we
have also transported liquefied natural gas (or LNG).
Our
tankers and LNG carriers provide transportation services to major oil companies,
oil traders and government agencies worldwide.

Our
offshore segment includes our shuttle tanker operations, floating storage and
off-take (or FSO)
units,
and our floating production, storage and offloading (or FPSO)
units,
which primarily operate under long-term fixed-rate contracts. As of December
31,
2006, our shuttle tanker fleet, which had a total cargo capacity of
approximately 4.4 million deadweight tones (or dwt),
represented approximately 65% of the total tonnage of the world shuttle tanker
fleet. Please read Item 4 - Information on the Company: Our Fleet.

Our
liquefied gas segment includes our LNG carriers and liquefied petroleum gas
(or
LPG)
carriers. All of our LNG and LPG carriers are subject to long-term fixed-rate
time charter contracts. As of December 31, 2006, this fleet, including
newbuildings, had a total cargo carrying capacity of 2.2 million cubic
meters.

Our
spot
tanker segment includes our conventional crude oil tankers and product carriers
operating on the spot market or subject to time charters or contracts of
affreightment priced on a spot-market basis or short-term fixed-rate contracts
(contracts with an initial term of less than three years). As of December 31,
2006, our Aframax tankers in this segment, which had a total cargo capacity
of
approximately 4.7 million dwt, represented approximately 7% of the total tonnage
of the world Aframax fleet. Please read Item 4 - Information on the Company:
Our
Fleet.

The
Teekay organization was founded in 1973. We are incorporated under the laws
of
the Republic of The Marshall Islands as Teekay Shipping Corporation and maintain
our principal executive headquarters at Bayside House, Bayside Executive Park,
West Bay Street & Blake Road, P.O. Box AP-59212, Nassau, The Bahamas. Our
telephone number at such address is (242) 502-8820. Our principal operating
office is located at Suite 2000, Bentall 5, 550 Burrard Street, Vancouver,
British Columbia, Canada, V6C 2K2. Our telephone number at such address is
(604)
683-3529.

During
2006, we acquired 64.5% of the outstanding shares of Petrojarl ASA, which
is
listed on the Oslo Stock Exchange, for $536.8 million. Petrojarl is a leading
independent operator of FPSO units. On December 1, 2006, we renamed
Petrojarl Teekay Petrojarl ASA. We financed our acquisition of Petrojarl
through
a combination of bank financing and cash balances.

Petrojarl,
based in Trondheim, Norway, has a fleet of four owned FPSO units operating
under
long-term service contracts in the North Sea. To service these contracts,
Petrojarl also charters two shuttle tankers and one FSO unit from us. We believe
that the combination of Petrojarl’s offshore engineering expertise and
reputation as a quality operator of FPSOs, and Teekay’s global marine operations
and extensive customer network, positions us to competitively pursue new FPSO
projects.

On
April
30, 2004, we acquired all of the outstanding shares of Naviera F. Tapias S.A.
and its subsidiaries and renamed it Teekay Shipping Spain S.L. (or Teekay
Spain).
Teekay
Spain engages in the marine transportation of crude oil and LNG. We funded
this
acquisition with a combination of cash, cash generated from operations and
borrowings under existing credit facilities. We believe the acquisition of
the
Teekay Spain business provided us with a strategic platform from which to expand
our presence in the LNG shipping sector and immediate access to reputable LNG
operations. We anticipate this will continue to benefit us when bidding on
future LNG projects. In the transaction, we also entered into an agreement
with
an entity controlled by the former controlling shareholder of Teekay Spain
to
establish a 50/50 joint venture that will pursue new business in the oil and
gas
shipping sectors that relate only to the Spanish market or are led by Spanish
entities or entities controlled by a Spanish company.

As
at
December 31, 2006, Teekay Spain’s LNG fleet consisted of four LNG carriers,
which are all contracted under long-term fixed-rate time charters to major
Spanish energy companies. As at December 31, 2006, Teekay Spain’s conventional
crude oil tanker fleet consisted of five Suezmax tankers, all of which are
contracted under long-term fixed-rate time charters with a major Spanish oil
company.

Additional
information about these acquisitions, including our financing of them, is
included in Item 5 - Operating and Financial Review and Prospects.

Public
Offerings

Anticipated
Public Offering by Teekay Tankers

On
April
17, 2007, we announced our intention to create a new publicly-listed entity
for
our conventional tanker business (or Teekay
Tankers).
It is
anticipated that Teekay Tankers will initially own a portion of our conventional
tanker fleet. Furthermore, it is expected that Teekay Tanker’s primary objective
will be to grow through the acquisition of conventional tanker assets from
third
parties and from us, which may include the vessels to be acquired by us from
our
planned acquisition of 50 percent of OMI Corporation.

We
believe that creating Teekay Tankers, as a separate public company, will
facilitate the growth of our conventional tanker business and further enhance
our innovative corporate structure, which supports our strategy of creating
value as an asset manager in the Marine Midstream space.

We
expect
to file with the U.S. Securities and Exchange Commission a registration
statement for the initial public offering of Teekay Tankers during the second
half of 2007. The securities may not be sold, nor may offers to buy be accepted,
prior to the time the registration statement becomes effective.

Public
Offering by Teekay Offshore Partners L.P.

On
December 19, 2006, our subsidiary, Teekay Offshore Partners L.P. (or
Teekay
Offshore)
sold as
part of its initial public offering 8.1 million of its common units,
representing limited partner interests, at $21.00 per unit for net proceeds
of
$155.3 million. Teekay Offshore owns 26% of Teekay Offshore Operating L.P.
(or
OPCO),
including its 0.01% general partner interest. OPCO owns and operates a fleet
of
36 of our shuttle tankers (including 12 chartered-in vessels), four of our
FSO
vessels, and nine or our conventional Aframax tankers. We directly own 74%
of
OPCO and 59.8% of Teekay Offshore, including its 2% general partner interest.
As
a result, we effectively own 89.5% of OPCO. Please read Item 18 - Financial
Statements: Note 4 - Public Offering of Teekay Offshore Partners
L.P.

Public
Offerings by Teekay LNG Partners L.P.

On
May
10, 2005, Teekay LNG Partners L.P. (or Teekay
LNG)
sold as
part of an initial public offering 6.9 million of its common units at $22.00
per
unit for net proceeds of $135.7 million. In November 2005, Teekay LNG completed
a follow-on public offering of 4.6 million common units at a price of $27.40
per
unit, for net proceeds of $120.0 million. We own a 67.8% interest in Teekay
LNG,
including its 2% general partner interest. Please read Item 18 - Financial
Statements: Note 5 - Public Offerings of Teekay LNG Partners L.P.

Teekay
Gas Services
provides gas transportation services, primarily under long-term fixed-rate
contracts to major energy and utility companies. These services currently
include the transportation of LNG and
LPG.

13

·

Teekay
Tanker Services
is
responsible for the commercial management of our conventional crude
oil
and product tanker transportation services. We offer a full range
of
flexible, customer-focused shipping solutions through our worldwide
network of commercial offices.

A
shuttle
tanker is a specialized ship designed to transport crude oil and condensates
from offshore oil field installations to onshore terminals and refineries.
Shuttle tankers are equipped with sophisticated loading systems and dynamic
positioning systems that allow the vessels to load cargo safely and reliably
from oil field installations, even in harsh weather conditions. Shuttle tankers
were developed in the North Sea as an alternative to pipelines. The first
cargo
from an offshore field in the North Sea was shipped in 1977, and the first
dynamically-positioned shuttle tankers were introduced in the early 1980s.
Shuttle tankers are often described as “floating pipelines” because these
vessels typically shuttle oil from offshore installations to onshore facilities
in much the same way a pipeline would transport oil along the ocean
floor.

Our
shuttle tankers are primarily subject to long-term, fixed-rate time-charter
contracts for a specific offshore oil field, where a vessel is hired for a
fixed
period of time, or under contracts of affreightment for various fields, where
we
commit to be available to transport the quantity of cargo requested by the
customer from time to time over a specified trade rout within a given period
of
time. The number of voyages performed under these contracts of affreightment
normally depends upon the oil production of each field. Competition for charters
is based primarily upon price, availability, the size, technical sophistication,
age and condition of the vessel and the reputation of the vessel's manager.
Technical sophistication of the vessel is especially important in harsh
operating environments such as the North Sea. Although the size of the world
shuttle tanker fleet has been relatively unchanged in recent years, conventional
tankers could be converted into shuttle tankers by adding specialized equipment
to meet the requirements of the oil companies. Shuttle tanker demand may also
be
affected by the possible substitution of sub-sea pipelines to transport oil
from
offshore production platforms.

As
of
December 31, 2006, there were approximately 65 vessels in the world shuttle
tanker fleet (including newbuildings), the majority of which operate in the
North Sea. Shuttle tankers also operate in Brazil, Canada, Russia, Australia
and
Africa. As of December 31, 2006, we owned 26 shuttle tankers and chartered-in
an
additional 12 shuttle tankers. Other shuttle tanker owners in the North Sea
include Knutsen OAS Shipping AS, JJ Ugland Group and Penny Ugland, which as
of
December 31, 2006 controlled small fleets of two to ten shuttle tankers each.
We
believe that we have significant competitive advantages in the shuttle tanker
market as a result of the quality, type and dimensions of our vessels combined
with our market share in the North Sea.

FSO
Units

FSO
units
provide on-site storage for oil field installations that have no storage
facilities or that require supplemental storage. An FSO unit is generally used
in combination with a jacked-up fixed production
system, floating production systems that do not have sufficient storage
facilities or as supplemental storage for fixed platform systems, which
generally have some on-board storage capacity. An FSO unit is usually of similar
design to a conventional tanker, but has specialized loading and offtake systems
required by field operators or regulators. FSO units are moored to the seabed
at
a safe distance from a field installation and receive the cargo from the
production facility via a dedicated loading system. An FSO unit is also equipped
with an export system that transfers cargo to shuttle or conventional tankers.
Depending on the selected mooring arrangement and where they are located, FSO
units may or may not have any propulsion systems. FSO units are usually
conversions of older single-hull conventional oil tankers. These conversions,
which include a loading and offtake system and hull refurbishment, can generally
extend the lifespan of a vessel by up to 20 years over the normal
conventional tanker lifespan of 25 years.

Our
FSO
units are generally placed on long-term, fixed-rate time charters or bareboat
charters as an integrated part of the field development plan, and thus provide
stable cash flow to us. Under a bareboat charter, the customer pays a fixed
daily rate for a fixed period of time for the full use of the vessel and becomes
responsible for all crewing, management and navigation of the vessel and the
expenses therefore.

As
of
December 31, 2006, there were approximately 76 FSO units operating and five
FSO
units on order in the world fleet. As at December 31, 2006, we had five FSO
units. The major markets for FSO units are Asia, the Middle East, West Africa
and the North Sea. Our primary competitors in the FSO market are conventional
tanker owners, who have access to tankers available for conversion, and oil
field services companies and oil field engineering and construction companies
who compete in the floating production system market. Competition in the FSO
market is primarily based on price, expertise in FSO operations, management
of
FSO conversions and relationships with shipyards, as well as the ability to
access vessels for conversion that meet customer specifications.

FPSO
Units

FPSO
units are offshore production facilities that are typically ship-shaped and
store processed crude oil in tanks located in the hull of the vessel. FPSO
units
are typically used as production facilities to develop marginal oil fields
or
deepwater areas remote from the existing pipeline infrastructure. Of four major
types of floating production systems, FPSO units are the most common type.
Typically, the other types of floating production systems do not have
significant storage and need to be connected into a pipeline system or use
an
FSO unit for storage. FPSO units are less weight-sensitive than other types
of
floating production systems and their extensive deck area provides flexibility
in process plant layouts. In addition, the ability to utilize surplus or aging
tanker hulls for conversion to an FPSO unit provides a relatively inexpensive
solution compared to the new construction of other floating production systems.
A majority of the cost of an FPSO comes from its top-side production equipment
and thus FPSO’s are expensive relative to conventional tankers. An FPSO unit
carries on-board all the necessary production and processing facilities normally
associated with a fixed production platform. As the name suggests, FPSOs are
not
fixed permanently to the seabed but are designed to be moored at one location
for long periods of time. In a typical FPSO unit installation, the untreated
wellstream is brought to the surface via subsea

14

equipment
on the sea floor that is connected to the FPSO unit by flexible flow lines
called risers. The risers carry oil, gas and water from the ocean floor to
the
vessel, which processes it onboard. The resulting crude oil is stored in the
hull of the vessel and subsequently transferred to tankers either via a buoy
or
tandem loading system for transport to shore.

Traditionally,
for large field developments, the major oil companies have owned and operated
new, custom built FPSO units. FPSO units for smaller fields have generally
been
provided by independent FPSO contractors under life-of-field production
contracts, where the contract's duration is for the useful life of the oil
field. FPSO
units have been used to develop offshore fields around the world since the
late
1970s. As of December 31, 2006, there were approximately 118 FPSO units
operating and 46 FPSO units on order in the world fleet. At
December 31, 2006, we had five FPSO units, including one on order. Most
independent FPSO contractors have backgrounds in marine energy transportation,
oil field services and/or oil field engineering and construction. The major
independent FPSO contractors are SBM Offshore, Prosafe, Bluewater, BW Offshore,
Modec, Fred Olsen, Aker and Maersk.

During
2006, approximately 39% of our net revenues wereearned
by
the vessels in the offshore segment, compared to approximately 32% in 2005
and
29% in 2004. Please read Item 5 - Operating and Financial Review and Prospects:
Results of Operations.

Liquefied
Gas Segment

The
vessels in our liquefied gas segment compete in the LNG and LPG markets.
LNG
carriers are usually chartered to carry LNG pursuant to time charter contracts
with a duration between 20 and 25 years, and with charter rates payable to
the
owner on a monthly basis. LNG shipping historically has been transacted with
these long-term, fixed-rate time charter contracts. LNG projects require
significant capital expenditures and typically involve an integrated chain
of
dedicated facilities and cooperative activities. Accordingly, the overall
success of an LNG project depends heavily
on long-range planning and coordination of project activities, including
marine
transportation. Although most shipping requirements for new LNG projects
continue to be provided on a long-term basis, spot voyages (typically consisting
of a single voyage) and short-term time charters of less than 12 months duration
have grown from 1% of the market in 1992 to approximately 13% in 2006.

In
the
LNG market, we compete principally with other private and state-controlled
energy and utilities companies that generally operate captive fleets, and
independent ship owners and operators. Many major energy companies compete
directly with independent owners by transporting LNG for third parties in
addition to their own LNG. Given the complex, long-term nature of LNG projects,
major energy companies historically have transported LNG through their captive
fleets. However, independent fleet operators have been obtaining an increasing
percentage of charters for new or expanded LNG projects as major energy
companies have continued to divest non-core businesses. The
major
operators of LNG carriers are Malaysian International Shipping, NYK Line, Shell
Group and Mitsui O.S.K.

LNG
carriers transport LNG internationally between liquefaction facilities and
import terminals. After natural gas is transported by pipeline from production
fields to a liquefaction facility, it is supercooled to a temperature of
approximately negative 260 degrees Fahrenheit. This process reduces its volume
to approximately 1 / 600th
of its
volume in a gaseous state. The reduced volume facilitates economical storage
and
transportation by ship over long distances, enabling countries with limited
natural gas reserves or limited access to long-distance transmission pipelines
to meet their demand for natural gas. LNG carriers include a sophisticated
containment system that holds and insulates the LNG so it maintains its liquid
form. The LNG is transported overseas in specially built tanks on double-hulled
ships to a receiving terminal, where it is offloaded and stored in heavily
insulated tanks. In regasification facilities at the receiving terminal, the
LNG
is returned to its gaseous state (or
regasified)
and
then shipped by pipeline for distribution to natural gas customers.

Most
new
LNG carriers, including all of our vessels, are being built with a membrane
containment system. These systems consist of insulation between thin primary
and
secondary barriers and are designed to accommodate thermal expansion and
contraction without overstressing the membrane. New LNG carriers are generally
expected to have a lifespan of approximately 40 years. Unlike the oil tanker
industry, there currently are no regulations that require the phase-out from
trading of LNG carriers after they reach a certain age. As at December 31,
2006,
there were approximately 222 vessels in the world LNG fleet, with an average
age
of approximately 12 years, and an additional 138 LNG carriers under construction
or on order for delivery through 2010.

Our
liquefied gas segment primarily consists of LNG carriers subject to long-term,
fixed-rate time-charter contracts. The acquisition of Teekay Spain on April
30,
2004 established our entry into the LNG shipping sector with four LNG carriers.
As at December 31, 2006, we had an additional eight newbuilding LNG carriers
on
order, all of which were scheduled to commence operations upon delivery under
long-term fixed-rate time charters and in which our interests range from 40%
to
70%. In addition, as at December 31, 2006, we had four LPG carriers, including
three under construction.

During
2006, approximately 7% of our net revenues wereearned
by
the vessels in the fixed-rate LNG segment, compared to approximately 7% in
2005
and 3% in 2004. Please read Item 5 - Operating and Financial Review and
Prospects: Results of Operations.

Spot
Tanker Segment

The
vessels in our spot tanker segment compete primarily in the Aframax tanker
market. In the Aframax market, international seaborne oil and other petroleum
products transportation services are provided by two main types of operators:
captive fleets of major oil companies (both private and state-owned) and
independent ship owner fleets. Many major oil companies and other oil trading
companies, the primary charterers of our vessels, also operate their own vessels
and transport their own oil and oil for third party charterers in direct
competition with independent owners and operators. Competition for charters
in
the Aframax spot charter market is intense and is based upon price, location,
the size, age, condition and acceptability of the vessel, and the reputation
of
the vessel's manager.

We
compete principally with other Aframax owners in the spot charter market through
the global tanker charter market. This market is comprised of tanker broker
companies that represent both charterers and ship owners in chartering
transactions. Within this market, some transactions, referred to as "market
cargoes," are offered by charterers through two or more brokers simultaneously
and shown to the widest possible range of owners; other transactions, referred
to as "private cargoes," are given by the charterer to only one broker and
shown
selectively to a limited number of owners whose tankers are most likely to
be
acceptable to the charterer and are in position to undertake the voyage.

Our
competition in the Aframax (75,000 to 119,999 dwt) market is also affected
by
the availability of other size vessels that compete in our markets. Suezmax
(120,000 to 199,999 dwt) size vessels and Panamax (50,000 to 74,999 dwt) size
vessels can compete for many of the same charters for which our Aframax tankers
compete. Because of their large size, Very Large Crude Carriers (200,000 to
319,999 dwt) (or VLCCs)
and
Ultra Large Crude Carriers (320,000+ dwt) (or ULCCs)
rarely
compete directly with Aframax tankers for specific charters. However, because
VLCCs and ULCCs comprise a substantial portion of the total capacity of the
market, movements by such vessels into Suezmax trades and of Suezmax vessels
into Aframax trades would heighten the already intense competition.

We
believe that we have competitive advantages in the Aframax tanker market as
a
result of the quality, type and dimensions of our vessels and our market share
in the Indo-Pacific and Atlantic Basins. As of December 31, 2006, our Aframax
tanker fleet (excluding Aframax-size shuttle tankers and newbuildings) had
an
average age of approximately 7 years, compared to an average age for the world
oil tanker fleet, including Aframax tankers, of approximately 9.2 years and
for
the world Aframax tanker fleet of approximately 8.6 years.

We
have
chartering staff located in Stavanger, Norway; Tokyo, Japan; London, England;
Houston, USA; and Singapore. Each office serves our clients headquartered
in
that office's region. Fleet operations, vessel positions and charter market
rates are monitored around the clock. We believe that monitoring such
information is critical to making informed bids on competitive brokered
business.

During
2006, approximately 42% of our net revenues were earned by the vessels in
the
spot tanker segment, compared to approximately 50% in 2005 and 61% in 2004.
Please read Item 5 - Operating and Financial Review and Prospects: Results
of
Operations.

Fixed-Rate
Tanker Segment

The
vessels in our fixed-rate tanker segment primarily consist of Aframax and
Suezmax tankers that are employed on long-term time charters. We consider
contracts that have an original term of less than three years in duration to
be
short-term. The only difference between the vessels in the spot tanker segment
and the fixed-rate tanker segment is the duration of the contract under which
they are employed. Charters of more than three years are not as common as
short-term charters and voyage charters for conventional tankers.

During
2006, approximately 12% of our net revenues wereearned
by
the vessels in the fixed-rate tanker segment, compared to approximately 11%
in
2005 and 7% in 2004. Please read Item 5 - Operating and Financial Review and
Prospects: Results of Operations.

Ship
Management

Safety
and environmental compliance are our top operational priorities. We operate
our
vessels in a manner intended to protect the safety and health of our employees,
the general public and the environment. We actively manage the risks inherent
in
our business and are committed to eliminating incidents that threaten the safety
and integrity of our vessels. We are also committed to reducing our emissions
and waste generation.

Customers
and vessel rating services have recognized us for safety, environment, quality
and service. Given the emphasis by customers on quality as a result of stringent
environmental regulations, and heightened concerns about liability for
environmental pollution, we believe that our emphasis on quality and safety
provides us with a favorable competitive profile. We are one of a few companies
who have fully integrated their health, safety, environment and quality
management systems. This integration has increased efficiencies in our
operations and management by reducing redundancies and better aligning our
strategies and programs in the relevant systems.

We
have
achieved certification under the standards reflected in International Standards
Organization’s (or ISO)
9001
for Quality Assurance, ISO 14001 for Environment Management Systems, OHSAS
18001
for Occupational Health and Safety, and the IMO’s International Management Code
for the Safe Operation of Ships and Pollution Prevention on a fully integrated
basis. As part of International Safety Management (ISM) Code compliance, all
of
our vessels’ safety management certificates are maintained through ongoing
internal audits performed by our certified internal auditors and intermediate
external audits performed by the classification society Det Norske
Veritas.

In
our
various worldwide facilities we carry out the critical ship management functions
of vessel maintenance, crewing, purchasing, shipyard supervision, insurance
and
financial management services for most of our fleet. These functions are
supported by onboard and onshore systems for maintenance, inventory, purchasing
and budget management. OSM Ship Management AS (or OSM),
a
company which is unrelated to us, provides ship management services for three
of
our conventional tankers. OSM is under contract to provide these services to
us
until October 2008.

We
establish key performance indicators to facilitate regular monitoring of our
operational performance. We set targets on an annual basis to drive continuous
improvement, and we review performance indicators monthly to determine if
remedial action is necessary to reach our targets. In 2003, we established
a
purchasing alliance with two other shipping companies and named it Teekay
Bergesen Worldwide. This alliance leverages the purchasing power of the combined
fleets, mainly in such commodity areas as lube oils, paints and other chemicals.

We
believe that the generally uniform design of some of our existing and
newbuilding vessels and the adoption of common equipment standards provides
operational efficiencies, including with respect to crew training and vessel
management, equipment operation and repair and spare parts ordering.

Risk
of Loss and Insurance

The
operation of any ocean-going vessel carries an inherent risk of catastrophic
marine disasters, death or injury of persons and property losses caused by
adverse weather conditions, mechanical failures, human error, war, terrorism,
piracy and other circumstances or events. In addition, the transportation of
crude oil and LNG is subject to the risk of spills and to business interruptions
due to political circumstances in foreign countries, hostilities, labor strikes
and boycotts. The occurrence of any of these events may result in loss of
revenues or increased costs.

We
carry
hull and machinery (marine and war risks) and protection and indemnity insurance
coverage to protect against most of the accident-related risks involved in
the
conduct of our business. Hull and machinery insurance covers loss of or damage
to a vessel due to marine perils such as collisions, grounding and weather.
Protection and indemnity insurance indemnifies us against liabilities incurred
while operating vessels, including

16

injury
to
our crew or third parties, cargo loss and pollution. The current available
amount of our coverage for pollution is $1 billion per vessel per incident.
We
also carry insurance policies covering war risks, including piracy and
terrorism. We do not generally carry insurance on our vessels covering the
loss
of revenues resulting from vessel off-hire time based on its cost compared
to
our off-hire experience.We
believe that our current insurance coverage is adequate to protect against
most
of the accident-related risks involved in the conduct of our business and that
we maintain appropriate levels of environmental damage and pollution insurance
coverage. However, we cannot assure that all covered risks are adequately
insured against, that any particular claim will be paid or that we will be
able
to procure adequate insurance coverage at commercially reasonable rates in
the
future. In addition, more stringent environmental regulations have resulted
in
increased costs for, and may result in the lack of availability of, insurance
against risks of environmental damage or pollution.

We
use in
our operations a thorough risk management program that includes, among other
things, computer-aided risk analysis tools, maintenance and assessment programs,
a seafarers competence training program, seafarers workshops and membership
in
emergency response organizations.

Operations
Outside the United States

Because
our operations are primarily conducted outside of the United States, they
may be
affected by currency fluctuations and by changing economic, political and
governmental conditions in the countries where we engage in business or where
our vessels are registered.

During
2006, we derived approximately 18% of our total net revenues from our operations
in the Indo-Pacific Basin, compared to approximately 19% during 2005. Past
political conflicts in that region, particularly in the Arabian Gulf, have
included attacks on tankers, mining of waterways and other efforts to disrupt
shipping in the area. Vessels trading in the region have also been subject
to,
in limited instances, acts of piracy. In addition to tankers, targets of
terrorist attacks could include oil pipelines, LNG facilities and offshore
oil
fields. The escalation of existing or the outbreak of future hostilities or
other political instability in this region or other regions where we operate
could affect our trade patterns, increase insurance costs, increase
tanker operational costs and otherwise adversely affect our operations and
performance. In addition, tariffs, trade embargoes, and other economic sanctions
by the United States or other countries against countries in the Indo-Pacific
Basin or elsewhere as a result of terrorist attacks or otherwise may limit
trading activities with those countries, which could also adversely affect
our
operations and performance.

Customers

We
have
derived, and believe that we will continue to derive, a significant portion
of
our revenues from a limited number of customers. Our customers include major
oil
companies, major oil traders, large oil consumers and petroleum product
producers, government agencies, and various other entities that depend upon
marine transportation. One customer, an international oil company, accounted
for
15% ($307.9 million) of our consolidated revenues during 2006 (20% or $392.2
million - 2005 and 17% or $373.7 million - 2004). No other customer accounted
for more than 10% of our consolidated revenues during 2006, 2005 or 2004. The
loss of any significant customer or a substantial decline in the amount of
services requested by a significant customer could have a material adverse
effect on our business, financial condition and results of
operations.

Our
Fleet

As
at
December 31, 2006, Teekay’s fleet (excluding vessels managed for third parties)
consisted of 158 vessels, including chartered-in vessels, newbuildings on order,
and vessels being converted to offshore units or shuttle tankers.

The
following table summarizes the Teekay fleet as at December 31,
2006:

Number
of Vessels(1)

Owned

Vessels

Chartered-in

Vessels

Newbuildings

/Conversions

Total

Offshore
Segment

Shuttle
Tankers(2)

26

12

2

40

FSO
Units(3)

5

-

-

5

FPSO
Units(4)

4

-

1

5

Total
Offshore Segment

35

12

3

50

Fixed-Rate
Tanker Segment

Conventional
Tankers (5)

15

2

2

19

Total
Fixed-Rate Tanker Segment

15

2

2

19

Liquefied
Gas Segment

LNG
Carriers (6)

5

-

8

13

LPG
Carriers

1

-

3

4

Total
Liquefied Gas Segment

6

-

11

17

Spot
Tanker Segment

Suezmax
Tankers

-

4

10

14

Aframax
Tankers (7)

21

11

-

32

Large
Product Tankers

5

7

3

15

Small
Product Tankers

-

11

-

11

Total
Spot Tanker Segment

26

33

13

72

Total

82

47

29

158

17

(1)

Excludes
vessels managed on behalf of third
parties.

(2)

Includes
five shuttle tankers in which our ownership interest is
50%.

(3)

Includes
one unit in which our ownership interest is
89%.

(4)

Includes
four FPSOs owned by Teekay Petrojarl, and one vessel being converted
to an
FPSO by a 50/50 joint venture between Teekay and Teekay
Petrojarl.

(5)

Includes
eight Suezmax tankers owned by Teekay
LNG.

(6)

Five
existing LNG vessels and two LNG newbuildings are owned by Teekay
LNG.
Teekay LNG has agreed to acquire Teekay’s 70% interest in two additional
LNG newbuildings and Teekay’s 40% interest in four additional LNG
newbuildings upon delivery of the
vessels.

(7)

Includes
nine Aframax tankers owned by Teekay Offshore and chartered to
Teekay.

Many
of
our Aframax vessels and some of our shuttle tankers have been designed and
constructed as substantially identical sister ships. These vessels can, in
many
situations, be interchanged, providing scheduling flexibility and greater
capacity utilization. In addition, spare parts and technical knowledge can
be
applied to all the vessels in the particular series, thereby generating
operating efficiencies.

As
of
December 31, 2006, we had 29 vessels under construction or undergoing conversion
to shuttle tankers or FPSOs. Please read Item 5 - Operating and Financial
Review
and Prospects: Management’s Discussion and Analysis of Financial Condition and
Results of Operations, and Item 18 - Financial Statements: Notes 17(a), 17(b),
and 17(c) - Commitments and Contingencies - Vessels Under
Construction.

The
hull
and machinery of all of our vessels have been “classed” by one of the major
classification societies: Det Norske Veritas, Lloyd’s Register of Shipping,
Nippon Kaiji Kyokai or American Bureau of Shipping. In addition, the processing
facilities of our FPSOs are “classed” by Det Norske Veritias. The classification
society certifies that the vessel has been built and maintained in accordance
with the rules of that classification society. Each vessel is inspected by
a
classification society surveyor annually, with either the second or third annual
inspection being a more detailed survey (an Intermediate
Survey)
and the
fourth or fifth annual inspection being the most comprehensive survey (a
Special
Survey).
The
inspection cycle resumes after each Special Survey. Vessels also may be required
to be drydocked at each Intermediate and Special Survey for inspection of the
underwater parts of the vessel in addition to a more detailed inspection of
hull
and machinery. Many of our vessels have qualified with their respective
classification societies for drydocking every four or five years in connection
with the Special Survey and are no longer subject to drydocking at Intermediate
Surveys. To qualify, we were required to enhance the resiliency of the
underwater coatings of each vessel hull to accommodate underwater inspections
by
divers.

The
vessel’s flag state, or the vessel’s classification society if nominated by the
flag state, also inspect our vessels to ensure they comply with applicable
rules
and regulations of the country of registry of the vessel and the international
conventions of which that country is a signatory. Port state authorities, such
as the U.S. Coast Guard and the Australian Maritime Safety Authority, also
inspect our vessels when they visit their ports.

Many
of
our customers also regularly inspect our vessels as a condition to chartering,
and regular inspections are standard practice under long-term charters.

We
believe that our relatively new, well-maintained and high-quality vessels
provide us with a competitive advantage in the current environment of increasing
regulation and customer emphasis on quality of service.

Our
vessels are also regularly inspected by our seafaring staff, who perform much
of
the necessary routine maintenance. Shore-based operational and technical
specialists also inspect our vessels at least twice a year. Upon completion
of
each inspection, action plans are developed to address any items requiring
improvement. All action plans are monitored until they are completed. The
objectives of these inspections are to:

·

ensure
adherence to our operating
standards;

·

maintain
the structural integrity of the
vessel;

·

maintain
machinery and equipment to give full reliability in
service;

·

optimize
performance in terms of speed and fuel consumption;
and

·

ensure
the vessel’s appearance will support our brand and meet customer
expectations.

To
achieve our vessel structural integrity objective, we use a comprehensive
“Structural Integrity Management System” we developed. This system is designed
to closely monitor the condition of our vessels and to ensure that structural
strength and integrity are maintained throughout a vessel’s life.

We
have
obtained approval for our safety management system as being in compliance with
the ISM Code. Our safety management system has also been certified as being
compliant with ISO 9001, ISO 14001 and OSHAS 18001 standards. To maintain
compliance, the system is audited regularly by either the vessels’ flag state
or, when nominated by the flag state, a classification society. Certification
is
valid for five years subject to satisfactorily completing internal and external
audits.

Organizational
Structure

Our
organizational structure includes our interests in Teekay Offshore and Teekay
LNG. These limited partnerships were set up primarily to hold our assets that
generate long-term fixed-rate cash flows. The strategic rationale for
implementing this structure was to:

·

illuminate
higher value of fixed-rate cash flows to Teekay investors;

·

realize
advantages of a lower cost of equity when investing in new projects;
and

18

·

enhance
returns to Teekay through fee-based revenue and ownership of the
incentive
distribution rights, which entitle the holder to disproportionate
distributions of available cash as cash distribution levels to unitholders
increase.

Teekay
Offshore is a Marshall Islands limited partnership formed by us in 2006 as
part
of our strategy to expand our operations in the offshore oil marine
transportation, processing and storage sectors. Teekay Offshore owns 26% of
OPCO, including its 0.01% general partner interest. OPCO owns and operates
a
fleet of 36 of our shuttle tankers (including 12 chartered-in vessels), four
of
our FSO vessels, and nine of our conventional Aframax tankers. All of OPCO’s
vessels operate under long-term, fixed-rate contracts. We directly own 74%
of
OPCO and 59.8% of Teekay Offshore, including its 2% general partner interest.
As
a result, we effectively own 89.5% of OPCO. Teekay Offshore also has rights
to
participate in certain FPSO opportunities relating to Petrojarl.

Teekay
LNG is a Marshall Islands limited partnership formed by us in 2005 as part
of
our strategy to expand our operations in the LNG shipping sector. Teekay LNG
provides LNG and crude oil marine transportation service under long-term,
fixed-rate contracts with major energy and utility companies through its fleet
of 13 LNG carriers (including six newbuildings) and eight Suezmax class crude
oil tankers.

Teekay
has entered into an omnibus agreement with Teekay LNG, Teekay Offshore and
others governing, among other things, when Teekay, Teekay LNG and Teekay
Offshore may compete with each other and certain rights of first offering
on LNG
carriers, oil tankers, shuttle tankers, FSO units and FPSO units.

The
following provides a summarized overview of our organizational structure
as at
March 1, 2007. Please read Exhibit 8.1 to this Annual Report for a list of
our
significant subsidiaries as at December 31, 2006.

(1)
Including our 64.5% interest in Teekay Petrojarl

C.
Regulations

Our
business and the operation of our vessels are significantly affected by
international conventions and national, state and local laws and regulations
in
the jurisdictions in which our vessels operate, as well as in the country or
countries of their registration. Because these conventions, laws and regulations
change frequently, we cannot predict the ultimate cost of compliance or their
impact on the resale price or useful life of our vessels. Additional
conventions, laws and regulations may be adopted that could limit our ability
to
do business or increase the cost of our doing business and that may materially
adversely affect our operations. We are required by various governmental and
quasi-governmental agencies to obtain permits, licenses and certificates with
respect to our operations. Subject to the discussion below we believe that
we
will be able to continue to obtain all permits, licenses and certificates
material to the conduct of our operations.

We
believe that the heightened environmental and quality concerns of insurance
underwriters, regulators and charterers will generally lead to greater
inspection and safety requirements on all vessels in the oil tanker and LNG
carrier markets and will accelerate the scrapping of older vessels throughout
these markets.

tankers
between 25 and 30 years old must be of double-hull construction or
of a
mid-deck design with double-side construction, unless they have wing
tanks
or double-bottom spaces, not used for the carriage of oil, which
cover at
least 30% of the length of the cargo tank section of the hull, or
are
capable of hydrostatically balanced loading which ensures at least
the
same level of protection against oil spills in the event of collision
or
stranding;

·

tankers
30 years old or older must be of double-hull construction or mid-deck
design with double-side construction;
and

·

all
tankers are subject to enhanced inspections.

Under
IMO
regulations, an oil tanker must be of double-hull construction, be of mid-deck
design with double-side construction or be of another approved design ensuring
the same level of protection against oil pollution in the event that such
tanker:

·

is
the subject of a contract for a major conversion or original construction
on or after July 6, 1993;

·

commences
a major conversion or has its keel laid on or after January 6, 1994;
or

·

completes
a major conversion or is a newbuilding delivered on or after July
6,
1996.

In
December 2003, the IMO revised its regulations relating to the prevention of
pollution from oil tankers. These regulations, which became effective in April,
2005, accelerate the mandatory phase-out of single-hull tankers and impose
a
more rigorous inspection regime for older tankers. As a result of these
regulations, in 2003 we recorded a non-cash write-down of the book value of
the
affected vessels. We subsequently sold all the vessels affected by these
regulations and no longer own any single-hull vessels.

IMO
regulations also include the International Convention for Safety of Life at
Sea
(or SOLAS),
including amendments to SOLAS implementing the International Security Code
for
Ports and Ships (or ISPS),
the
ISM Code, the International Convention on Prevention of Pollution from Ships
(the MARPOL
Convention),
the
International Convention on Civic Liability for Oil Pollution Damage of 1969,
the International Convention on Load Lines of 1966, and, specifically with
respect to LNG carriers, the International Code for Construction and Equipment
of Ships Carrying Liquefied Gases in Bulk (or the IGC
Code).
SOLAS
provides rules for the construction of and equipment required for commercial
vessels and includes regulations for safe operation. Flag states which have
ratified the convention and the treaty generally employ the classification
societies, which have incorporated SOLAS requirements into their class rules,
to
undertake surveys to confirm compliance.

SOLAS
and
other IMO regulations concerning safety, including those relating to treaties
on
training of shipboard personnel, lifesaving appliances, radio equipment and
the
global maritime distress and safety system, are applicable to our operations.
Non-compliance with IMO regulations, including SOLAS, the ISM Code, ISPS and
the
IGC Code, may subject us to increased liability or penalties, may lead to
decreases in available insurance coverage for affected vessels and may result
in
the denial of access to, or detention in, some ports. For example, the Coast
Guard and European Union authorities have indicated that vessels not in
compliance with ISM Code will be prohibited from trading in U.S. and European
ports.

The
ISM
Code requires vessel operators to obtain a safety management certification
for
each vessel they manage, evidencing the shipowner’s compliance with requirements
of the ISM Code relating to the development and maintenance of an extensive
“Safety Management System.” Such a system includes, among other things, the
adoption of a safety and environmental protection policy setting forth
instructions and procedures for safe operation and describing procedures for
dealing with emergencies. Each of the existing vessels in our fleet currently
is
ISM Code-certified, and we expect to obtain safety management certification
for
each newbuilding vessel upon delivery.

ISPS
was
adopted in December 2002 in the wake of heightened concern over worldwide
terrorism and became effective on July 1, 2004. The objective of ISPS is to
enhance maritime security by detecting security threats to ships and ports
and
by requiring the development of security plans and other measures designed
to
prevent such threats. The United States implemented ISPS with the adoption
of
the Maritime Transportation Security Act of 2002 (or MTSA),
which
requires vessels entering U.S. waters to obtain certification of plans to
respond to emergency incidents there, including identification of persons
authorized to implement the plans. Each of the existing vessels in our fleet
currently complies with the requirements of ISPS and MTSA, and we expect all
relevant newbuildings to comply upon delivery.

LNG
carriers are also subject to regulation under the IGC Code. Each LNG carrier
must obtain a certificate of compliance evidencing that it meets the
requirements of the IGC Code, including requirements relating to its design
and
construction. Each of our LNG carriers currently is in substantial compliance
with the IGC Code, and each of our LNG newbuilding shipbuilding contracts
requires compliance prior to delivery.

Annex VI
to MARPOL, which became effective internationally in May, 2005, sets limits
on
sulfur dioxide and nitrogen oxide emissions from ship exhausts and prohibits
deliberate emissions of ozone depleting substances. Annex VI also imposes a
global cap on the sulfur content of fuel oil and allows for specialized areas
to
be established internationally with more stringent controls on sulfur emissions.
For vessels over 400 gross tons, Annex VI imposes various survey and
certification requirements. The United States has not yet ratified
Annex VI. Vessels operated internationally, however, are subject to the
requirements of Annex VI in those countries that have implemented its
provisions. We believe that the cost of our complying with Annex VI will
not be material.

Environmental
Regulations—The United States Oil Pollution Act of 1990 (or
OPA
90).OPA
90
established an extensive regulatory and liability regime for the protection
and
cleanup of the environment from oil spills, including discharges of oil cargoes,
fuel (or bunkers)
or
lubricants. OPA 90 affects all owners and operators whose vessels trade to
the
United States or its territories or possessions or whose vessels operate in
United States waters, which include the U.S. territorial sea and 200-mile
exclusive economic zone around the United States.

Under
OPA
90, vessel owners, operators and bareboat charterers are “responsible parties”
and are jointly, severally and strictly liable (unless the spill results solely
from the act or omission of a third party, an act of God or an act of war and
the responsible party reports the incident and reasonably cooperates with the
appropriate authorities) for all containment and clean-up costs and other
damages arising from discharges or threatened discharges of oil from their
vessels. These other damages are defined broadly to include:

·

natural
resources damages and the related assessment costs;

·

real
and personal property damages;

·

net
loss of taxes, royalties, rents, fees and other lost revenues;

20

·

lost
profits or impairment of earning capacity due to property or natural
resources damage;

·

net
cost of public services necessitated by a spill response, such as
protection from fire, safety or health hazards; and

·

loss
of subsistence use of natural resources.

OPA
90
limits the liability of responsible parties. Effective as of October 9,
2006, the limit for double-hulled tank vessels was increased to the greater
of
$1,900 per gross ton or $16 million per tanker that is over
3,000 gross tons per incident, subject to adjustment for inflation. These
limits of liability would not apply if the incident were proximately caused
by
violation of applicable U.S. federal safety, construction or operating
regulations, including IMO conventions to which the United States is a
signatory, or by the responsible party’s gross negligence or willful misconduct,
or if the responsible party fails or refuses to report the incident or to
cooperate and assist in connection with the oil removal activities. We currently
plan to continue to maintain for each vessel pollution liability coverage
in the
amount of $1 billion per incident. A catastrophic spill could exceed the
coverage available, which could harm our business, financial condition and
results of operations.

Under
OPA
90, with limited exceptions, all newly built or converted tankers delivered
after January 1, 1994 and operating in United States waters must be built with
double-hulls, and existing vessels that do not comply with the double-hull
requirement must be phased out over a 20-year period (1995 to 2015) based on
size, age and hull construction. Vessels with double-sides and double-bottoms
are granted an additional five years of service life before being phased out.
Notwithstanding the phase-out period, OPA 90 currently permits existing
single-hull tankers to operate until the year 2015 if their operations within
United States waters are limited to discharging at the Louisiana Off-shore
Oil
Platform, or off-loading by means of lightering activities within authorized
lightering zones more than 60 miles offshore. All of our existing tankers are,
and all of our newbuildings will be, double-hulled.

In
December 1994, the U.S. Coast Guard (or Coast
Guard)
implemented regulations requiring evidence of financial responsibility in
the
amount of $1,500 per gross ton for tankers, coupling the then existing OPA
limitation on liability of $1,200 per gross ton with the Comprehensive
Environmental Response, Compensation, and Liability Act (or CERCLA)
liability limit of $300 per gross ton. The financial responsibility limits
have not been increased
to comport with the amended statutory limits of OPA. However, the Coast Guard
has issued a notice of policy change indicating its intention to change the
financial responsibility regulations accordingly. Under the regulations,
such
evidence of financial responsibility may be demonstrated by insurance, surety
bond, self-insurance, guaranty or an alternate method subject to agency
approval. Under OPA 90, an owner or operator of a fleet of vessels is required
only to demonstrate evidence of financial responsibility in an amount sufficient
to cover the tanker in the fleet having the greatest maximum limited liability
under OPA 90 and CERCLA.

The
Coast
Guard’s regulations concerning certificates of financial responsibility (or
COFR)
provide, in accordance with OPA 90, that claimants may bring suit directly
against an insurer or guarantor that furnishes COFR. In addition, in the
event
that such insurer or guarantor is sued directly, it is prohibited from asserting
any contractual defense that it may have had against the responsible party
and
is limited to asserting those defenses available to the responsible party
and
the defense that the incident was caused by the willful misconduct of the
responsible party. Certain organizations, which had typically provided COFR
under pre-OPA 90 laws, including the major protection and indemnity
organizations have declined to furnish evidence of insurance for vessel owners
and operators if they are subject to direct actions or required to waive
insurance policy defenses. The Coast Guard has indicated that it intends
to
propose a rule that would increase the required amount of such COFRs to $2,200
per gross ton to reflect the higher limits on liability imposed by OPA 90,
as described above.

The
Coast
Guard's financial responsibility regulations may also be satisfied by evidence
of surety bond, guaranty or by self-insurance. Under the self-insurance
provisions, the shipowner or operator must have a net worth and working capital,
measured in assets located in the United States against liabilities located
anywhere in the world, that exceeds the applicable amount of financial
responsibility. We have complied with the Coast Guard regulations by obtaining
financial guaranties from a third-party. If other vessels in our fleet trade
into the United States in the future, we expect to obtain additional guarantees
from third-party insurers or to provide guarantees through
self-insurance.

OPA
90
and CERCLA permit individual states to impose their own liability regimes with
regard to oil or hazardous substance pollution incidents occurring within their
boundaries if the state’s regulations are equally or more stringent, and some
states have enacted legislation providing for unlimited strict liability for
spills. Several coastal states, including California, Washington and Alaska,
require state specific COFR and vessel response plans. We intend to comply
with
all applicable state regulations in the ports where our vessels
call.

Owners
or
operators of tank vessels operating in United States waters are required to
file
vessel response plans with the Coast Guard, and their tank vessels are required
to operate in compliance with their Coast Guard approved plans. Such response
plans must, among other things:

·

address
a “worst case” scenario and identify and ensure, through contract or other
approved means, the availability of necessary private response resources
to respond to a “worst case
discharge”;

·

describe
crew training and drills; and

·

identify
a qualified individual with full authority to implement removal actions.

We
have
filed vessel response plans with the Coast Guard for the vessels we own and
have
received approval of such plans for all vessels in our fleet to operate in
United States waters. In addition, we conduct regular oil spill response drills
in accordance with the guidelines set out in OPA 90. The Coast Guard has
announced it intends to propose similar regulations requiring certain vessels
to
prepare response plans for the release of hazardous substances.

CERCLA
contains a similar liability regime to OPA 90, but applies to the discharge
of
“hazardous substances” rather than “oil.” Petroleum products and LNG should not
be considered hazardous substances under CERCLA, but additives to oil or
lubricants used on LNG carriers might fall within its scope. CERCLA imposes
strict joint and several liability upon the owner, operator or bareboat
charterer of a vessel for cleanup costs and damages arising from a discharge
of
hazardous substances.

OPA
90
and CERCLA do not preclude claimants from seeking damages for the discharge
of
oil and hazardous substances under other applicable law, including maritime
tort
law. Such claims could include attempts to characterize the transportation
of
LNG aboard a vessel as an ultra-hazardous activity under a doctrine that would
impose strict liability for damages resulting from that activity. The
application of this doctrine varies by jurisdiction. There can be no assurance
that a court in a particular jurisdiction will not determine that the carriage
of oil or LNG aboard a vessel is an ultra-hazardous activity, which would expose
us to strict liability for damages caused to parties even when we have not
acted
negligently.

Environmental
Regulation—Other Environmental Initiatives.

21

Although
the United States is not a party, many countries have ratified and follow the
liability scheme adopted by the IMO and set out in the International Convention
on Civil Liability for Oil Pollution Damage, 1969, as amended (or
CLC), and the Convention for the Establishment of an International
Fund for Oil Pollution of 1971, as amended. Under these conventions, which
are
applicable to vessels that carry persistent oil (not LNG) as cargo, a vessel's
registered owner is strictly liable for pollution damage caused in the
territorial waters of a contracting state by discharge of persistent oil,
subject to certain complete defenses. Many of the countries that have ratified
the CLC have increased the liability limits through a 1992 Protocol to the
CLC.
The liability limits in the countries that have ratified this Protocol are
currently approximately $6.8 million plus approximately $960 per gross
registered tonne above 5,000 gross tonnes with an approximate maximum of $137
million per vessel and the exact amount tied to a unit of account which varies
according to a basket of currencies. The right to limit liability is forfeited
under the CLC when the spill is caused by the owner's actual fault or privity
and, under the 1992 Protocol, when the spill is caused by the owner's
intentional or reckless conduct. Vessels trading to contracting states must
provide evidence of insurance covering the limited liability of the owner.
In
jurisdictions where the CLC has not been adopted, various legislative schemes
or
common law govern, and liability is imposed either on the basis of fault or
in a
manner similar to the CLC.

In
addition, the IMO, various countries and states, such as Australia, the United
States and the State of California, and various regulators, such as port
authorities, the U.S. Coast Guard and the U.S. Environmental Protection Agency,
have either adopted legislation or regulations, or are separately considering
the adoption of legislation or regulations, aimed at regulating the
transmission, distribution, supply and storage of LNG, the discharge of ballast
water and the discharge of bunkers as potential pollutants, and requiring the
installation on ocean-going vessels of pollution prevention equipment such
as
oily water separators and bilge alarms.

The
United States Clean Water Act prohibits the discharge of oil or hazardous
substances in U.S. navigable waters and imposes strict liability in the form
of
penalties for unauthorized discharges. The Clean Water Act also imposes
substantial liability for the costs of removal, remediation and damages and
complements the remedies available under the more recent OPA 90 and CERCLA
discussed above. Pursuant to regulations promulgated
by the U.S. Environmental Protection Agency (or EPA)
in the
early 1970s, the discharge of sewage and effluent from properly functioning
marine engines was exempted from the permit requirements of the National
Pollution Discharge Elimination System. This exemption allowed vessels in
U.S.
ports to discharge certain substances, including ballast water, without
obtaining a permit to do so. However, on March 30, 2005, a U.S. District
Court for the Northern District of California granted summary judgment to
certain environmental groups and U.S. states that had challenged the EPA
regulations, arguing that the EPA exceeded its authority in promulgating
them.
On September 18, 2006, the U.S. District Court issued an order invalidating
the exemption in EPA’s regulations for all discharges incidental to the normal
operation of a vessel as of September 30, 2008, and directing EPA to
develop a system for regulating all discharges from vessels by that
date.

Although
the EPA may appeal this decision, if the exemption is repealed, we would
be
subject to the Clean Water Act permit requirements that could include ballast
water treatment obligations that could increase the costs of operating in
the
United States. For example, this ruling could: require the installation of
equipment on our vessels to treat ballast water before it is discharged:
require
the implementation of other port facility disposal arrangements or procedures
at
potentially substantial cost and/or otherwise restrict our vessels traffic
in
U.S. waters.

In
Norway, the Norwegian Pollution Control Authority requires the installation
of
volatile organic compound emissions (or VOC
equipment)
on most
shuttle tankers serving the Norwegian continental shelf. Oil companies bear
the
cost to install and operate the VOC equipment onboard the shuttle
tankers.

Shuttle
Tanker, FSO Unit and FPSO Unit Regulation

Our
shuttle tankers primarily operate in the North Sea. In addition to the
regulations imposed by the IMO, countries having jurisdiction over North Sea
areas impose regulatory requirements in connection with operations in those
areas, including HSE in the United Kingdom and NPD in Norway. These regulatory
requirements, together with additional requirements imposed by operators in
North Sea oil fields, require that we make further expenditures for
sophisticated equipment, reporting and redundancy systems on our shuttle tankers
and for the training of seagoing staff. Additional regulations and requirements
may be adopted or imposed that could limit our ability to do business or further
increase the cost of doing business in the North Sea. In Brazil, Petrobras
serves in a regulatory capacity and has adopted standards similar to those
in
the North Sea.

D.
Taxation of the Company

The
following discussion is a summary of the principal United States, Bahamian,
Bermudian, Marshall Islands, Norwegian and Spanish tax laws applicable to us.
The following discussion of tax matters, as well as the conclusions regarding
certain issues of tax law that are reflected in such discussion, are based
on
current law. No assurance can be given that changes in or interpretation of
existing laws will not occur or will not be retroactive or that anticipated
future factual matters and circumstances will in fact occur. Our views have
no
binding effect or official status of any kind, and no assurance can be given
that the conclusions discussed below would be sustained if challenged by taxing
authorities.

United
States Taxation

The
following discussion is based upon the provisions of the U.S. Internal Revenue
Code of 1986, as amended (or the Code),
existing and proposed U.S. Treasury Department regulations, administrative
rulings, pronouncements and judicial decisions, all as of the date of this
Annual Report.

Taxation
of Operating Income. We
expect
that substantially all of our gross income will be attributable to the
transportation of crude oil and related products. For this purpose, gross income
attributable to transportation (or Transportation
Income)
includes income derived from, or in connection with, the use (or hiring or
leasing for use) of a vessel to transport cargo, or the performance of services
directly related to the use of any vessel to transport cargo, and thus includes
both time charter or bareboat charter income.

Transportation
Income that is attributable to transportation that begins or ends, but that
does
not both begin and end, in the United States (or U.S. Source
InternationalTransportation
Income)
will be
considered to be 50.0% derived from sources within the United States.
Transportation Income attributable to transportation that both begins and ends
in the United States (or U.S.Source
Domestic Transportation Income)
will be
considered to be 100.0% derived from sources within the United States.
Transportation Income attributable to transportation exclusively between
non-U.S. destinations will be considered to be 100% derived from sources
outside the United States. Transportation Income derived from sources outside
the United States generally will not be subject to U.S. federal income
tax.

22

We
have
made special U.S. tax elections in respect of some of our vessel-owning or
vessel-operating subsidiaries that are potentially engaged in activities which
could give rise to U.S. Source International Transportation Income. Our
Norwegian, Canadian and Spanish subsidiaries that occasionally transport cargoes
to and from the United States are eligible to claim exemption from United States
tax under the United States-Norway or United States-Canada Income Tax
Treaties. Other subsidiaries that are engaged in activities which could give
rise to U.S. Source International Transportation Income rely on our ability
to
claim exemption under Section 883 of the Code (the Section
883 Exemption).

The
Section 883 Exemption. In
general, the Section 883 Exemption provides that if a
non-U.S. corporation satisfies the requirements of Section 883 of the
Code and the Treasury Regulations thereunder (or the Section 883
Regulations),
it
will not be subject to the net basis and branch taxes or 4.0% gross basis tax
described below on its U.S. Source International Transportation Income. The
Section 883 Exemption only applies to U.S. Source International
Transportation Income. As discussed below, we believe the Section 883
Exemption will apply and we will not be taxed on our U.S. Source
International Transportation Income. The Section 883 Exemption does not
apply to U.S. Source Domestic Transportation Income.

A
non-U.S. corporation will qualify for the Section 883 Exemption if,
among other things, it is organized in a jurisdiction outside the United States
that grants an equivalent exemption from tax to corporations organized in the
United States (or an Equivalent
Exemption)
and it
meets one of three ownership tests (or the Ownership
Test)
described in the Final Section 883 Regulations.

We
are
organized under the laws of the Republic of the Marshall Islands. The
U.S. Treasury Department has recognized the Republic of the Marshall
Islands as a jurisdiction that grants an Equivalent Exemption. Consequently,
our
U.S. Source International Transportation Income (including for this
purpose, any such income earned by our subsidiaries that have properly elected
to be treated as partnerships or disregarded as entities separate from us for
U.S. federal income tax purposes) will be exempt from U.S. federal
income taxation provided we meet the Ownership Test described in the Section
883
Regulations. We
believe that we should satisfy the Ownership Test because
our stock is primarily and regularly traded on an established securities market
in the United States within the meaning of the Section 883 of the Code and
the
Treasury Regulations thereunder.
We can give no assurance that any changes in the ownership of our stock
subsequent to the date of this report will permit us to continue to qualify
for
the Section 883 exemption.

The
4.0% Gross Basis Tax. If
the
Section 883 Exemption does not apply and the net basis tax does not apply,
we would be subject to a 4.0% U.S. federal income tax on the
U.S. source portion of our gross U.S. Source International
Transportation Income, without benefit of deductions. For 2006 and 2005,
approximately 8.7% and 13.1%, respectively, of our gross shipping revenues
were
U.S. Source International Transportation Income and the average U.S. federal
income tax on such U.S. Source International Transportation Income would have
been approximately $7.0 million and $10.3 million, respectively, for 2006 and
2005.

The
Net Basis Tax and Branch Profits Tax. If
we
earn U.S. Source International Transportation Income and the
Section 883 Exemption does not apply, such income may be treated as
effectively connected with the conduct of a trade or business in the United
States (or Effectively
Connected Income)
if we
have a fixed place of business in the United States and substantially all of
our
U.S. Source International Transportation Income is attributable to
regularly scheduled transportation or, in the case of bareboat charter income,
is attributable to a fixed placed of business in the United States. Based on
our
current operations, none of our potential U.S. Source International
Transportation Income is attributable to regularly scheduled transportation
or
is received pursuant to bareboat charters. As a result, we do not anticipate
that any of our U.S. Source International Transportation Income will be
treated as Effectively Connected Income. However, there is no assurance that
we
will not earn income pursuant to regularly scheduled transportation or bareboat
charters attributable to a fixed place of business in the United States in
the
future, which would result in such income being treated as Effectively Connected
Income.

U.S. Source
Domestic Transportation Income generally will be treated as Effectively
Connected Income. However, we do not anticipate that we any of our income has
or
will be U.S. Source Domestic Transportation Income.

Any
income we earn that is treated as Effectively Connected Income would be subject
to U.S. federal corporate income tax (the highest statutory rate is
currently 35.0%). In addition, if we earn income that is treated as Effectively
Connected Income, a 30.0% branch profits tax imposed under Section 884 of
the Code generally would apply to such income, and a branch interest tax
could be imposed on certain interest paid or deemed paid by us.

On
the
sale of a vessel that has produced Effectively Connected Income, we could be
subject to the net basis corporate income tax and to the 30.0% branch profits
tax with respect to our gain not in excess of certain prior deductions for
depreciation that reduced Effectively Connected Income. Otherwise, we would
not
be subject to U.S. federal income tax with respect to gain realized on the
sale of a vessel, provided the sale is considered to occur outside of the United
States under U.S. federal income tax principles.

Marshall
Islands, Bahamian and Bermudian Taxation

We
believe that neither we nor our subsidiaries will be subject to taxation under
the laws of the Marshall Islands, the Bahamas or Bermuda, or that distributions
by our subsidiaries to us will be subject to any taxes under the laws of such
countries.

Norwegian
Taxation

The
following discussion is based upon the current tax laws of the Kingdom of
Norway
and regulations, the Norwegian tax administrative practice and judicial
decisions thereunder, all as in effect as of the date of this Annual Report
and
subject to possible change on a retroactive basis. The following discussion
is
for general information purposes only and does not purport to be a comprehensive
description of all of the Norwegian income tax considerations applicable
to
us.

Our
Norwegian subsidiaries are subject to taxation in Norway on their income
regardless of where the income is derived. The generally applicable Norwegian
income tax rate is 28.0%.

Taxation
of Norwegian Subsidiaries Engaged inBusiness
Activities. All
of
our Norwegian subsidiaries are subject to normal Norwegian taxation. Generally,
a Norwegian resident company is taxed on its income realized for tax purposes.
The starting point for calculating taxable income is the company’s income as
shown on its annual accounts, calculated under generally accepted accounting
principles and as adjusted for tax purposes. Gross income will include capital
gains, interest, dividends from certain corporations and foreign exchange
gains.

23

The
Norwegian companies also are taxed on any gains resulting from the sale of
depreciable assets. The gain on these assets is taken into income for Norwegian
tax purposes at a rate of 20.0% per year on a declining balance
basis.

Norway
does not allow consolidation of the income of companies in a corporate group
for
Norwegian tax purposes. However, a group of companies that is ultimately
owned
more than 90.0% by a single company can transfer its Norwegian taxable income
to
another Norwegian resident company in the group by making a transfer to the
other company (this is referred to as making a “group contribution”). The
ultimate parent in the corporate group can be a foreign company.

Group
contributions are deductible for the contributing company for tax purposes
and
are included in the taxable income of the receiving company in the income
year
in which the contribution is made. Group contributions are subject to the
same
rules as dividend distributions under the Norwegian Companies Act. In other
words, group contributions are restricted to the amount that is available
to
distribute as dividends for corporate law purposes.

Taxation
of Dividends. Generally,
dividends received by a Norwegian resident company are exempt from Norwegian
taxation. The exemption does not apply to dividends from companies resident
outside the European Economic Area if (a) the country of residence is a
low-tax country or (b) the ownership of shares in the distributing company
is considered to be a “portfolio investment” (i.e.
less
than 10.0% share ownership or less than two years continuous ownership period).
Dividends not exempt from Norwegian taxation are subject to the general 28.0%
income tax rate when received by the Norwegian resident company. We believe
that
dividends received by our Norwegian subsidiaries will not be subject to
Norwegian tax.

Correction
Income Tax. Our
Norwegian subsidiaries may be subject to a tax, called correction
income tax, on
their
dividend distributions. Norwegian correction tax is levied if a dividend
distribution leads to the company’s balance sheet equity at year end being lower
than the company’s paid-in
share capital (including share premium), plus a calculated amount equal to
72.0%
of the net positive temporary timing differences between the company’s book
values and tax values.

As
a
result, correction tax is effectively levied if dividend distributions result
in
the company’s financial statement equity for accounting purposes being reduced
below its equity calculated for tax purposes (i.e.
when
dividends are paid out of accounting earnings that have not been subject
to
taxation in Norway). In addition to dividend distributions, correction tax
may
also be levied on the partial liquidation of the share capital of the company
or
if the company makes group contributions that are in excess of taxable income
for the year.

Taxation
of Interest Paid by Norwegian Entities.
Norway
does not levy any tax or withholding tax on interest paid by a Norwegian
resident company to a company that is not resident in Norway (provided that
the
interest rate and the debt/equity ratio are based on arms-length principles).
Therefore, any interest paid by our Norwegian subsidiaries to companies that
are
not resident in Norway will not be subject to Norwegian withholding
tax.

Taxation
on Distributions by Norwegian Entities.
Norway
levies a 25.0% withholding tax on non-residents of Norway that receive dividends
from a Norwegian resident company. However, if the recipient of the dividend
is
resident in a country that has an income tax treaty with Norway or that is
a
member of the European Economic Area, the Norwegian withholding tax may be
reduced or eliminated. We believe that distributions by our Norwegian
subsidiaries will be subject to a reduced amount of Norwegian withholding
tax or
not be subject to Norwegian withholding tax.

We
don’t
expect that payment of Norwegian income taxes will have a material effect
on our
results.

Spanish
Taxation

Spain
imposes income taxes on income generated by our majority owned Spanish
subsidiary’s shipping related activities at a rate of 35%. Two alternative
Spanish tax regimes provide incentives for Spanish companies engaged in shipping
activities, the Canary Islands Special Ship Registry (or CISSR)
and the
Spanish Tonnage Tax Regime (or TTR).
As at
December 31, 2006, all but two of our vessels operated by our operating Spanish
subsidiaries were subject to the TTR.

Under
the
TTR, the applicable income tax is based on the weight (measured as net tonnage)
of the vessel and the number of days during the taxable period that the vessel
is at the company’s disposal, excluding time required for repairs. The tax base
ranges from 0.20 Euros per day per 100 tonnes to 0.90 Euros per day per 100
tonnes, against which the generally applicable tax rate of 35% applies. If
the
shipping company also engages in activities other than those subject to the
TTR
regime, income from those other activities is subject to tax at the generally
applicable rate of 35%. If a vessel is acquired and disposed of by a company
while it is subject to the TTR regime, any gain on the disposition of the vessel
generally is not subject to Spanish taxation. If the company acquired the vessel
prior to becoming subject to the TTR regime or if the company acquires a used
vessel after becoming subject to the TTR regime, the difference between the
fair
market value of the vessel at the time it enters into the TTR and the tax value
of the vessel at that time is added to the taxable income in Spain when the
vessel is disposed of and generally remains subject to Spanish taxation at
the
rate of 35%.

Our
two
Spanish subsidiary’s vessels which are registered in the CISSR are allowed
a credit, equal to 90% of the tax payable on income from the commercial
operation of the Canary Islands registered ships, against the tax otherwise
payable. This effectively results in an income tax rate of approximately 3.5%
on
income from the operation of these vessels. Vessel sales are subject to the
full
35% Spanish tax rate. A 20% reinvestment credit it available if the entire
gross
proceeds from the vessel sale are reinvested in a qualifying asset and if the
asset disposed of has been held for a minimum period of one year.

We
don’t
expect Spanish income taxes will have a material effect on our
results.

Item
4A. Unresolved Staff Comments

Not
applicable.

24

Item
5. Operating and Financial Review and Prospects

Management's
Discussion and Analysis of Financial Condition and Results of
Operations

General

Teekay
is
a leading provider of international crude oil and petroleum product
transportation services. Since 2004, we have also transported liquefied natural
gas (or LNG).
Through our acquisition of Petrojarl ASA (or Petrojarl)
during
2006, we have expanded into the offshore oil production and processing sector.
As at December 31, 2006, our fleet (excluding vessels managed for third parties)
consisted of 158 vessels (including 47 vessels time-chartered-in and 26
newbuildings on order). Our conventional oil tankers provide a total
cargo-carrying capacity of approximately 14.9 million deadweight tonnes (or
mdwt),
our
LNG carriers (including newbuildings) have total cargo-carrying capacity of
approximately 2.0 million cubic meters, and our floating production, storage
and
offloading (or FPSO)
units
have total production capacity of approximately 0.3 million barrels per
day.

Our
revenues are derived from:

·

Voyage
charters, which are charters for shorter intervals that are priced
on a
current, or “spot,” market rate;

·

Time
charters and bareboat charters, whereby vessels are chartered to
customers
for a fixed period of time at rates that are generally fixed, but
may
contain a variable component, based on inflation, interest rates
or
current market rates;

·

Contracts
of affreightment, where we carry an agreed quantity of cargo for
a
customer over a specified trade route within a given period of time;
and

·

FPSO
service contracts, where we produce, process, store and offload cargo
for
a customer for a fixed rate per barrel or a fixed daily rate or a
combination thereof.

The
table
below illustrates the primary distinctions among these types of charters and
contracts:

Voyage
Charter(1)

Time
Charter

Bareboat
Charter

Contract
of

Affreightment

FPSO
Service

Contracts

Typical
contract length

Single
voyage

One
year or more

One
year or more

One
year or more

More
than one year

Hire
rate basis(2)

Varies

Daily

Daily

Typically
daily

Varies

Voyage
expenses(3)

We
pay

Customer
pays

Customer
pays

We
pay

Customer
pays

Vessel
operating expenses(3)

We
pay

We
pay

Customer
pays

We
pay

We
pay

Off-hire(4)

Customer
does not pay

Varies

Customer
typically pays

Customer
typically

does
not pay

Varies

___________________

(1)

Under
a consecutive voyage charter, the customer pays for idle
time.

(2)

“Hire”
rate refers to the basic payment from the charterer for the use of
the
vessel.

(3)

Defined
below under “Important Financial and Operational Terms and
Concepts.”

(4)

“Off-hire”
refers to the time a vessel is not available for
service.

Segments

Our
fleet
is divided into four main segments, the offshore segment, the fixed-rate tanker
segment, the liquefied gas segment and the spot tanker segment.

Offshore
Segment

Our
offshore segment includes our shuttle tanker operations, FPSO units, and
floating storage and offtake (or FSO)
units.
We use these vessels to provide transportation, processing and storage services
to oil companies operating offshore oil field installations, primarily in the
North Sea. These services are typically provided under long-term fixed-rate
time
charter contracts, contracts of affreightment or FPSO service contracts.
Historically, the utilization of shuttle tankers and FPSO units in the North
Sea
is higher in the winter months, as favorable weather conditions in the summer
months provide opportunities for repairs and maintenance to our vessels and
the
offshore oil platforms, which generally reduces oil production.

In
February 2006, we were awarded 13-year fixed-rate contracts to charter two
Suezmax shuttle tankers and one Aframax shuttle tanker to Fronape International
Company, a subsidiary of Petrobras Transporte S.A., the shipping arm of Petroleo
Brasileiro S.A. (or Petrobras).
In
connection with these contracts, we have exercised the purchase option on a
2000-built Aframax tanker that previously traded as part of our spot tanker
segment and have acquired a 2006-built Suezmax tanker, both of which will be
converted to shuttle tankers during the first half of 2007. Please read Item
18
- Financial Statements: Note 17 - Commitments and Contingencies. The third
vessel commenced operation under these contracts in July 2006.

In
September 2006, we were awarded a two-year contract by Petrobras, to supply
an
FPSO for the Siri project in Brazil. Petrobras has options to extend the
contract up to an additional year, commencing in 2008. Please read Item 18
-
Financial Statements: Note 17 - Commitments and Contingencies.

In
January 2007, we ordered two Aframax shuttle tanker newbuildings which are
scheduled to deliver during the third quarter of 2010, for a total cost of
approximately $240 million. We anticipate that these vessels will service either
new long-term, fixed-rate contracts we may be awarded prior to delivery or
our
contracts of affreightment in the North Sea.

Fixed-Rate
Tanker Segment

Our
fixed-rate tanker segment includes conventional crude oil and product tankers
on
long-term, fixed-rate time charters. As at December 31, 2006, we had on order
for our fixed-rate tanker segment two Aframax newbuilding conventional crude
oil
tankers scheduled to be delivered in January and April 2008, respectively.
Upon
their deliveries, the vessels will commence 10-year time charters to a 50%-owned
joint venture that provides lightering services primarily in the Gulf of
Mexico.

In
addition, as of March 31, 2007, we had six newbuilding LNG carriers on order.
Two of these carriers, in which we have a 70% interest, will commence service
under 20-year, fixed-rate time charters to The Tangguh Production Sharing
Contractors, a consortium led by BP Berau, a subsidiary of BP plc, upon vessel
deliveries, which are scheduled for late 2008 and early 2009. The remaining
30%
interest in the project is held by BLT LNG Tangguh Corporation, a subsidiary
of
PT Berlian Tanker Tbk. We will have operational responsibility for the vessels
in this project. Pursuant to existing agreements, on November 1, 2006, Teekay
LNG agreed to acquire our ownership interest in these two vessels and related
charter contracts upon delivery of the first LNG carrier.

The
remaining four LNG newbuilding carriers, in which we have a 40% interest, will
commence service under 25-year, fixed-rate time charters (with options to extend
up to an additional 10 years) to Ras Laffan Liquefied Natural Gas Co. Limited
(3) (or RasGas
3),
a
joint venture company between Qatar Petroleum and a subsidiary of ExxonMobil
Corporation, upon vessel deliveries, which are scheduled for the first half
of
2008. The remaining 60% interest in the project is held by Qatar Gas Transport
Company Ltd. We will have operational responsibility for the vessels in this
project. Under the charters, Qatar Gas Transport Company Ltd. may assume
operational responsibility beginning 10 years following delivery of the vessels.
Pursuant to existing agreements, on November 1, 2006, Teekay LNG agreed to
acquire our ownership interest in these four vessels and related charter
contracts upon delivery of the first LNG carrier.

In
December 2006, our subsidiary, Teekay LNG, has agreed to acquire three LPG
newbuilding carriers from I.M. Skaugen ASA (or Skaugen)
for
approximately $29.2 million per vessel. Skaugen engages in the marine
transportation of petrochemical gases and LPG and the lightering of crude oil.
The
vessels are currently under construction and are scheduled to deliver between
early 2008 and mid-2009. Upon delivery, Teekay LNG will acquire these vessels
and they will be chartered to Skaugen, for a period of 15 years.

Spot
Tanker Segment

Our
spot
tanker segment consists of conventional crude oil tankers and product carriers
operating on the spot market or subject to time charters or contracts of
affreightment priced on a spot-market basis or short-term fixed-rate contracts.
We consider contracts that have an original term of less than three years in
duration to be short-term. Substantially all of our conventional Aframax, large
product, medium product and small product tankers are among the vessels included
in the spot tanker segment. Our spot market operations contribute to the
volatility of our revenues, cash flow from operations and net income.
Historically, the tanker industry has been cyclical, experiencing volatility
in
profitability and asset values resulting from changes in the supply of, and
demand for, vessel capacity. In addition, tanker spot markets historically
have
exhibited seasonal variations in charter rates. Tanker spot markets are
typically stronger in the winter months as a result of increased oil consumption
in the northern hemisphere and unpredictable weather patterns that tend to
disrupt vessel scheduling. As at December 31, 2006, we had three large product
tankers scheduled to be delivered between January and May 2007 and ten Suezmax
tankers scheduled to be delivered between June 2008 and August
2009.

During
2006, we acquired 64.5% of the outstanding shares of Petrojarl ASA, which is
listed on the Oslo Stock Exchange. Petrojarl is a leading independent operator
of FPSO units. On December 1, 2006, we renamed Petrojarl Teekay Petrojarl
ASA. We financed the $536.8 million cash purchase price through a combination
of
bank financing and cash balances. Please read Item 4 - Information on the
Company: Business Acquisitions and Divestitures - Acquisition of Petrojarl
ASA.
and Item 18 - Financial Statements: Note 3 - Acquisition of Petrojarl
ASA.

Anticipated
Public Offering by Teekay Tankers

On
April
17, 2007, we announced our intention to create a new publicly-listed entity
for
our conventional tanker business (or Teekay
Tankers).
It is
anticipated that Teekay Tankers will initially own a portion of our conventional
tanker fleet. Furthermore, it is expected that Teekay Tanker’s primary objective
will be to grow through the acquisition of conventional tanker assets from
third
parties and from us, which may include the vessels to be acquired by us from
our
planned acquisition of 50 percent of OMI Corporation.

We
believe that creating Teekay Tankers, as a separate public company, will
facilitate the growth of our conventional tanker business and further enhance
our innovative corporate structure, which supports our strategy of creating
value as an asset manager in the Marine Midstream space.

We
expect
to file with the U.S. Securities and Exchange Commission a registration
statement for the initial public offering of Teekay Tankers during the second
half of 2007. The securities may not be sold, nor may offers to buy be accepted,
prior to the time the registration statement becomes effective.

Public
Offering by Teekay Offshore Partners L.P.

On
December 19, 2006, our subsidiary, Teekay Offshore Partners L.P. (or
Teekay
Offshore)
sold,
as part of its initial public offering 8.1 million of its common units, which
represents limited partner interests, at $21.00 per unit for proceeds of $155.3
million, net of $13.8 million of commissions and other expenses associated
with
the offering.

On
May
10, 2005, Teekay LNG sold as part of an initial public offering, 6.9 million
of
its common units at $22.00 per unit for proceeds of $135.7 million, net of
$16.1
million of commissions and other expenses associated with the
offering.

In
November 2005, Teekay LNG completed a follow-on public offering of 4.6 million
common units at a price of $27.40 per unit. Proceeds from the follow-on offering
were $120.0 million, net of $6.0 million of commissions and other expenses
associated with the offering. We own a 67.8% interest in Teekay LNG, including
its 2% general partner interest. Please read Item 18 - Financial Statements:
Note 5 - Public Offerings of Teekay LNG Partners L.P.

Acquisition
of Teekay Shipping Spain, S.L.

On
April
30, 2004, we acquired 100% of the issued and outstanding shares of Teekay Spain
for $298.2 million in cash and the assumption of existing debt and then
remaining newbuilding commitments.Please
read Item 4 - Information on the Company: Business Acquisitions and Divestitures
- Acquisition of Teekay Shipping Spain S.L., formerly Naviera F. Tapias S.A.
and
Item 18 - Financial Statements: Note 6 - Acquisition of Teekay Shipping Spain
S.L.

Important
Financial and Operational Terms and Concepts

We
use a
variety of financial and operational terms and concepts when analyzing our
performance. These include the following:

Revenues.
Revenues
primarily include revenues from voyage charters, time charters, contracts of
affreightment and FPSO service contracts. Revenues are affected by hire rates
and the number of calendar-ship-days a vessel operates and the daily production
volume on FPSO units. Revenues are also affected by the mix of business between
time charters, voyage charters and contracts of affreightment. Hire rates for
voyage charters are more volatile, as they are typically tied to prevailing
market rates at the time of a voyage.

Forward
Freight Agreements.
We are
exposed to freight rate risk for vessels in our spot tanker segment from changes
in spot market rates for vessels. In certain cases, we use forward freight
agreements (or FFAs)
to
manage this risk. FFAs involve contracts to provide a fixed number of
theoretical voyages at fixed-rates, thus hedging a portion of our exposure
to
the spot charter market. These agreements are recorded as assets or liabilities
and measured at fair value. Changes in the fair value of the FFAs are recognized
in other comprehensive income (loss) until the hedged item is recognized as
revenue in income. The ineffective portion of a change in fair value is
immediately recognized into income through revenues.

Voyage
Expenses.
Voyage
expenses are all expenses unique to a particular voyage, including any bunker
fuel expenses, port fees, cargo loading and unloading expenses, canal tolls,
agency fees and commissions. Voyage expenses are typically paid by the customer
under time charters and FPSO service contracts and by us under voyage charters
and contracts of affreightment. When we pay voyage expenses, we typically add
them to our hire rates at an approximate cost.

Net
Revenues.
Net
revenues represent revenues less voyage expenses. Because the amount of voyage
expenses we incur for a particular charter depends upon the form of the charter,
we use net revenues to improve the comparability between periods of reported
revenues that are generated by the different forms of charters and contracts.
We
principally use net revenues, a non-GAAP financial measure, because it provides
more meaningful
information to us about the deployment of our vessels and their performance
than
revenues, the most directly comparable financial measure under accounting
principles generally accepted in the United States (or GAAP).

Vessel
Operating Expenses.
Under
all types of charters and contracts for our vessels, except for bareboat
charters, we are responsible for vessel operating expenses, which include
crewing, repairs and maintenance, insurance, stores, lube oils and communication
expenses.

Income
from Vessel Operations. To
assist
us in evaluating our operations by segment, we analyze our income from vessel
operations for each segment, which represents the income we receive from the
segment after deducting operating expenses, but prior to the deduction of
interest expense, income taxes, foreign currency and other income and losses.

Drydocking.
We must
periodically drydock each of our vessels for inspection, repairs and maintenance
and any modifications to comply with industry certification or governmental
requirements. Generally, we drydock each of our vessels every two and a half
to
five years, depending upon the type of vessel and its age. In addition, a
shipping society classification intermediate survey is performed on our LNG
carriers between the second and third year of the five-year drydocking period.
We capitalize a substantial portion of the costs incurred during drydocking
and
for the survey and amortize those costs on a straight-line basis from the
completion of a drydocking or intermediate survey to the estimated completion
of
the next drydocking. We expense as incurred costs for routine repairs and
maintenance performed during drydocking that do not improve or extend the useful
lives of the assets and annual class survey costs for our FPSO units. The number
of drydockings undertaken in a given period and the nature of the work performed
determine the level of drydocking expenditures.

charges
related to the depreciation of the historical cost of our fleet (less
an
estimated residual value) over the estimated useful lives of our
vessels;

·

charges
related to the amortization of drydocking expenditures over the estimated
number of years to the next scheduled drydocking;
and

·

charges
related to the amortization of the fair value of the time charters,
contracts of affreightment, customer relationships and intellectual
property where amounts have been attributed to those items in
acquisitions; these amounts are amortized over the period which the
asset
is expected to contribute to our future cash flows.

Revenue
Days.
Revenue
days are the total number of calendar days our vessels were in our possession
during a period, less the total number of off-hire days during the period
associated with major repairs, drydockings or special or intermediate surveys.
Consequently, revenue days represents the total number of days available for
the
vessel to earn revenue. Idle days, which are days when the vessel is available
for the vessel to earn revenue, yet is not employed, are included in revenue
days. We use revenue days to explain changes in our net revenues between
periods.

Calendar-ship-days.
Calendar-ship-days are equal to the total number of calendar days that our
vessels were in our possession during a period. As a result, we use
calendar-ship-days primarily in explaining changes in vessel operating expenses,
time charter hire expense and depreciation and amortization.

Restricted
Cash Deposits.
Under
the terms of the tax leases for four of our LNG carriers, we are required to
have on deposit with financial institutions an amount of cash that, together
with interest earned on the deposit, will equal the remaining amounts owing
under the leases, including the obligations to purchase the LNG carriers at
the
end of the lease periods, where applicable. During vessel construction however,
the amount of restricted cash approximates the accumulated vessel construction
costs. These cash deposits are restricted to being used for capital lease
payments and have been fully funded with term loans and loans from our joint
venture partners. Please read Item 18 - Financial Statements: Note 11 - Capital
Leases and Restricted Cash.

Tanker
Market Overview

During
2006, crude tanker freight rates remained close to the high levels experienced
in 2005. High levels of global oil production coupled with increasingly
longer-haul trade patterns and moderate growth in fleet supply compared to
previous years underpinned the strength in tanker earnings. In the product
tanker market, rates for large tankers declined as a result of heavier than
usual petrochemical plant maintenance schedules and growth in fleet supply.
However, rates for medium and intermediate sized product tankers remained
at
historically high levels as import volumes into key consuming regions rose
with
imports generally being sourced from longer haul sources.

World
gross domestic product growth averaged 5.3% during 2006, which was the highest
since the 1970s led by growth in emerging economies (Brazil, Russia, India
and
China), Africa, the Middle East and the United States. However, high energy
prices resulted in global oil consumption growing at the slowest pace since
2002. Overall high volumes of global oil production, oil stock building and
an
overall increase in transportation distances offset the moderate growth in
world
fleet supply, keeping the world tanker fleet fully utilized and spot freight
rates at high levels.

Global
oil demand for 2006 averaged 84.5 million barrels per day (or mb/d),
which
was 0.8 mb/d (or 1.0%) higher than 2005. Oil demand in OECD countries contracted
as a result of high energy prices, while China accounted for almost half of
the
1.2 mb/d growth in oil consumption among non-OECD countries. Overall, global
oil
supply rose by 0.8 mb/d (or 1.0%) over 2005, averaging 85.3 mb/d. The growth
in
global oil production was led by a 0.6 mb/d increase in non-OPEC, primarily
from
the Former Soviet Union and Angola. The size of the world tanker fleet rose
to
342.8 mdwt as of December 31, 2006, up 18.6 mdwt (or 5.7%) from the end of
2005.
Tanker supply growth was not as high as previous years as a result of lower
deliveries with some shipyards bringing forward container ship deliveries.
The
world tanker orderbook rose to 135 mdwt as at December 31, 2006; the highest
levels since the 1970’s, as newbuilding orders surged to almost three times 2005
levels.

The
overall tanker market fundamentals for 2007 remain positive led by continued
strength in the global economy.

As
of
March 2007, the International Energy Agency estimated global oil demand growth
of 1.5 mb/d (or 1.8%) for 2007 compared to 2006, led by increased demand
in
China and North America. A large drawdown in stocks in the Atlantic basin
(OECD
North America and Europe) in early 2007may
lead
to higher import volumes during the summer months which, which coupled with
a
forecasted increase in demand for OPEC oil in the latter half of the year,
would
support demand for tankers during 2007. Non-OPEC production is expected to
grow
by close to 1.0 mb/d during the 2007, with most of the growth coming from
the
Former Soviet Union, Africa and Latin America, which would continue to support
demand for medium-size oil tankers. Sales of tankers for offshore and other
conversion projects increased significantly early in 2007. When combined
with
the mandatory scrapping of single-hulled tankers for 2007, we expect this
will
have the effect of dampening overall tanker supply growth.

The
trend
of longer-haul trade patterns has continued as consumers in Asia diversify
their
sources of crude imports and refinery capacity in the Atlantic basin remains
tight.

In
accordance with GAAP, we report gross revenues in our income statements and
include voyage expenses among our operating expenses. However, shipowners base
economic decisions regarding the deployment of their vessels upon anticipated
TCE rates, and industry analysts typically measure bulk shipping freight rates
in terms of TCE rates. This is because under time charter contracts the customer
usually pays the voyage expenses while under voyage charters and contracts
of
affreightment the shipowner usually pays the voyage expenses, which typically
are added to the hire rate at an approximate cost. Accordingly, the discussion
of revenue below focuses on net revenues (i.e.
revenues
less voyage expenses) and TCE rates of our four reportable segments where
applicable. Pleaseread
Item
18 - Financial Statements: Note 2 - Segment Reporting.

The
following tables compare our operating results by reportable segment for 2006,
2005 and 2004, and compare our net revenues (which is a non-GAAP financial
measure) by reportable segment for 2006, 2005 and 2004 to revenues, the most
directly comparable GAAP financial measure:

28

2006

Fixed-Rate

Liquefied

Spot

Offshore

Tanker

Gas

Tanker

Segment

Segment

Segment

Segment

Total

($000's)

($000's)

($000's)

($000's)

($000's)

Revenues

667,847

181,605

104,489

1,059,365

2,013,306

Voyage
expenses

89,642

1,999

975

429,501

522,117

Net
revenues

578,205

179,606

103,514

629,864

1,491,189

Vessel
operating expenses

134,866

44,083

18,912

59,489

257,350

Time
charter hire expense

170,662

16,869

-

214,991

402,522

Depreciation
and amortization

105,861

32,741

33,160

52,203

223,965

General
and administrative (1)

58,048

16,000

15,685

88,182

177,915

Writedown
/ (gain) on sale of vessels and equipment

698

-

-

(2,039

)

(1,341

)

Restructuring
charge

-

-

-

8,929

8,929

Income
from vessel operations

108,070

69,913

35,757

208,109

421,849

2005

Fixed-Rate

Liquefied

Spot

Offshore

Tanker

Gas

Tanker

Segment

Segment

Segment

Segment

Total

($000's)

($000's)

($000's)

($000's)

($000's)

Revenues

559,094

170,256

102,423

1,122,845

1,954,618

Voyage
expenses

69,137

2,919

70

347,043

419,169

Net
revenues

489,957

167,337

102,353

775,802

1,535,449

Vessel
operating expenses

87,059

39,731

17,434

62,525

206,749

Time
charter hire expense

168,178

26,082

-

273,730

467,990

Depreciation
and amortization

89,177

29,702

31,545

55,105

205,529

General
and administrative (1)

43,779

12,720

13,743

89,465

159,707

Writedown
/ (gain) on sale of vessels and equipment

2,820

-

-

(142,004

)

(139,184

)

Restructuring
charge

955

-

-

1,927

2,882

Income
from vessel operations

97,989

59,102

39,631

435,054

631,776

2004

Fixed-Rate

Liquefied

Spot

Offshore

Tanker

Gas

Tanker

Segment

Segment

Segment

Segment

Total

($000's)

($000's)

($000's)

($000's)

($000's)

Revenues

595,148

124,929

48,370

1,450,791

2,219,238

Voyage
expenses

71,755

5,303

221

355,116

432,395

Net
revenues

523,393

119,626

48,149

1,095,675

1,786,843

Vessel
operating expenses

82,908

32,593

9,594

93,394

218,489

Time
charter hire expense

176,005

18,053

-

263,122

457,180

Depreciation
and amortization

100,439

27,478

14,011

95,570

237,498

General
and administrative (1)

44,948

10,835

4,588

70,371

130,742

Writedown
/ (gain) on sale of vessels and equipment

(3,725

)

(3,428

)

-

(72,101

)

(79,254

)

Restructuring
charge

-

-

-

1,002

1,002

Income
from vessel operations

122,818

34,095

19,956

644,317

821,186

(1)

Includes
direct general and administrative expenses and indirect general and
administrative expenses (allocated to each segment based on estimated
use
of corporate resources).

The
following table provides a summary of the changes in calendar-ship-days by
owned
and chartered-in vessels for our offshore segment:

2006

(Calendar
Days)

2005

(Calendar
Days)

Percentage
Change

(%)

Owned
Vessels

9,510

9,580

(0.7

)

Chartered-in
Vessels

4,983

4,963

0.4

Total

14,493

14,543

(0.3

)

29

The
average fleet size of our offshore segment (including vessels chartered-in)
was
primarily unchanged during 2006 compared to 2005. This was primarily the result
of:

·

the
acquisition of Petrojarl, which operates four FPSO units and one
shuttle
tanker; and

·

the
consolidation of five 50%-owned joint ventures, each of which owns
one
shuttle tanker, effective December 1, 2006 upon amendments of the
operating agreements, which granted us control of these joint ventures
(the Consolidation
of Joint Ventures);

offset
by

·

the
sale of one 1981-built shuttle tanker in July 2006 (the
2006 Shuttle Tanker Disposition);
and

·

the
sale of two older shuttle tankers in March 2005 and October 2005
(the
2005 Shuttle Tanker Dispositions).

In
addition, during March 2005, we sold and leased back an older shuttle tanker.
This had the effect of increasing the average number of chartered-in vessels
and
decreasing the average number of owned vessels during 2006 compared to 2005.

Net
Revenues.
Net
revenues increased 18.0% to $578.2 million for 2006, from $490.0 million for
2005, primarily due to:

·

an
increase of $80.7 million relating to the Petrojarl
acquisition;

·

an
increase of $5.4 million from the 2006 transfer of certain of our
shuttle
tankers servicing contracts of affreightment to short-term time-charter
contracts, which had higher average
rates;

·

an
increase of $4.9 million from time-charter contract renewals during
2006
at higher daily rates;
and

·

an
increase of $3.8 million due to the Consolidation of Joint Ventures;

partially
offset by

·

a
decrease of $8.1 million relating to the 2006 and 2005 Shuttle Tanker
Dispositions; and

·

a
decrease of $4.5 million due to an extended drydocking of the Nordic
Trym during
the second half of 2006.

As
part
of the acquisition of Petrojarl, we assumed certain FPSO service contracts
which
have terms that are less favourable than terms that could be realized in a
current market transaction. This contract value liability, which was recognized
on the date of acquisition, is being amortized to revenue over the remaining
firm period of the current FPSO contracts, on a weighted basis, based on the
projected revenue to be earned under the contracts. The amount of amortization
relating to these contracts included in 2006 revenue was $22.4 million. Please
read Item 18 - Financial Statements: Note 7 - Goodwill, Intangible Assets and
In-Process Revenue Contracts.

Vessel
Operating Expenses.
Vessel
operating expenses increased 54.9% to $134.9 million for 2006, from $87.1
million for 2005, primarily due to:

·

an
increase of $38.1 million relating to the Petrojarl
acquisition;

·

an
increase of $5.8 million in increased salaries for crew and officers
primarily due to a change in crew composition on one vessel upon
the
commencement of a new short-term time charter contract in 2005
and general
wage escalations;

·

an
increase of $2.0 million resulting from the depreciation of the U.S.
Dollar from corresponding 2005 levels relative to other currencies
in
which we pay certain vessel operating expenses;

·

a
total increase of $1.5 million relating to repairs and maintenance
for certain vessels during 2006 and an increase in the cost of lubricants
as a result of higher crude costs;
and

·

an
increase of $1.2 million relating to the Consolidation of Joint Ventures;

partially
offset by

·

a
decrease of $2.8 million from the 2005 Shuttle Tanker
Dispositions.

Time-Charter
Hire Expense.
Time-charter hire expense increased slightly to $170.7 million for 2006, from
$168.2 million for 2005, primarily due to:

·

a
0.6% increase in the number of vessels chartered-in; and

·

a
slight increase in the average per day time-charter hire expense
to
$34,247 for 2006, from $33,886 for
2005.

Depreciation
and Amortization.
Depreciation and amortization expense increased 18.7% to $105.9 million for
2006, from $89.2 million for 2005, primarily due to:

·

an
increase of $22.4 from the Petrojarl acquisition;
and

·

an
increase of $1.2 million from the Consolidation of Joint
Ventures;

30

partially
offset by

·

a
decrease of $3.6 million relating to the 2006 and 2005 Shuttle Tanker
Dispositions and the sale and leaseback of one shuttle tanker in
March
2005; and

·

a
decrease of $2.8 million relating to a reduction in amortization from
the expiration during 2005 of two contracts of affreightment and
from the
contracts of affreightment acquired as part of our purchase of Navion
AS
in 2003, which are being amortized over their respective lives, with
the
amount amortized each year being weighted based on the projected
revenue
to be earned under the contracts.

Depreciation
and amortization expense included amortization of drydocking costs of $5.4
million for 2006, compared to $6.3 million for 2005, and includes amortization
of intangible assets of $12.9 million for 2006, compared to $14.9 million for
2005.

Vessel
and Equipment Writedowns and Gain on Sale of Vessels.
Vessel
and equipment writedowns and gain on sale of vessels for 2006 was a net loss
of
$0.7 million, which was primarily comprised of:

·

a
$5.5 million writedown on a volatile organic compound (or VOC)
plant on one of our shuttle tankers which was redeployed from the
North
Sea to Brazil; this VOC plant will be removed and re-installed on
another
shuttle tanker in our fleet; and

·

a
$2.2 million writedown of the carrying value of certain offshore
equipment
that was employed under a short-term contract servicing a marginal
oil
field that was prematurely shut down due to lower than expected oil
production; this writedown occurred due to a reassessment of the
estimated
net realizable value of the equipment and follows a $12.2 million
writedown in 2005 arising from early termination of the contract
for the
equipment;

partially
offset by

·

a
$6.4 million gain from the 2006 Shuttle Tanker Disposition;
and

·

a
$0.5 million gain from amortization of a deferred gain on the sale
and
leaseback of an older shuttle tanker in March
2005.

Vessel
and equipment writedowns and gain on sale of vessels for 2005 was a net loss
of
$2.8 million, which was comprised of:

·

a
$12.2 million writedown of the carrying value of certain offshore
equipment as described above;

partially
offset by

·

a
$9.1 million gain from the 2005 Shuttle Tanker Dispositions;
and

·

a
$0.3 million gain from amortization of a deferred gain on the sale
and
leaseback of an older shuttle tanker in March
2005.

Restructuring
Charges.
Restructuring charges of $1.0 million in 2005 relate to the closure of our
Sandefjord, Norway office. We incurred no restructuring charges in 2006 in
our
offshore segment.

Fixed-Rate
Tanker Segment

The
following table provides a summary of the changes in calendar-ship-days by
owned
and chartered-in vessels for our fixed-rate tanker segment:

2006

(Calendar
Days)

2005

(Calendar
Days)

Percentage
Change

(%)

Owned
Vessels

5,475

4,973

10.1

Chartered-in
Vessels

728

1,194

(39.0

)

Total

6,203

6,167

0.6

The
average fleet size of our fixed-rate tanker segment (including vessels
chartered-in) increased slightly in 2006 compared to 2005. This increase was
primarily the result of:

·

the
delivery of a Suezmax tanker newbuilding in July 2005 (the Suezmax
Delivery);

·

the
inclusion of an Aframax tanker, which previously operated in our
spot
tanker segment and, commenced service under a long-term time charter
during the fourth quarter of 2005 (the Aframax
Transfer);
and

·

the
inclusion of a chartered-in VLCC, previously operating in our spot
tanker
segment, that commenced service under a long-term time charter in
April
2005 (the VLCC
Transfer);

partially
offset by

·

a
reduction in our chartered-in fleet resulting from the expiry of
our
methanol carrier charter
agreements.

Net
Revenues.
Net
revenues increased 7.3% to $179.6 million for 2006, from $167.3 million for
2005, primarily due to:

31

·

an
increase of $8.9 million relating to the Suezmax
Delivery;

·

an
increase of $6.7 million relating to the Aframax Transfer;

·

an
increase of $4.9 million relating to the VLCC Transfer;
and

·

an
increase of $4.0 million due to adjustments to the daily charter
rate
based on inflation and increases from rising interest rates in accordance
with the time charter contracts for five Suezmax tankers. (However,
under
the terms of our capital leases for our tankers subject to these
charter
rate fluctuations, we had a corresponding increase in our lease payments,
which is reflected as an increase to interest expense. Therefore,
these
interest rate adjustments, which will continue, did not affect our
cash
flow or net income);

partially
offset by

·

a
decrease of $11.9 million relating to the completion of a contract
of
affreightment primarily serviced by the chartered-in methanol
carriers.

Vessel
Operating Expenses.
Vessel
operating expenses increased 11.0% to $44.1 million for 2006, from $39.7 million
for 2005, primarily due to:

·

an
increase of $1.8 million relating to the Aframax Transfer;

·

an
increase of $1.5 million relating to the Suezmax Delivery;
and

·

an
increase of $1.0 million due to increased repairs and maintenance
activities.

Time-Charter
Hire Expense.
Time-charter hire expense decreased 35.3% to $16.9 million for 2006, compared
to
$26.1 million for 2005, primarily due to:

·

a
decrease of $11.6 million relating to the expiry of our chartered-in
methanol carrier contracts;

partially
offset by

·

an
increase of $2.3 million related to the VLCC
transfer.

Depreciation
and Amortization.
Depreciation and amortization expense increased 10.2% to $32.7 million for
2006,
from $29.7 million for 2005, primarily due:

·

an
increase of $1.5 million relating to the delivery of the Suezmax
tanker
newbuilding in July 2005; and

·

an
increase of $1.3 million from the Aframax
transfer.

Depreciation
and amortization expense included amortization of drydocking costs of $2.4
million for 2006, compared to $2.0 million for 2005, and included amortization
of contracts of $0.3 million for 2006, compared to $0.4 million for 2005.

Liquefied
Gas Segment

The
following table provides a summary of the changes in calendar-ship-days for
our
liquefied gas segment:

2006

(Calendar
Days)

2005

(Calendar
Days)

Percentage
Change

(%)

Owned
Vessels

1,887

1,825

3.4

We
operated four LNG carriers and one LPG carrier during 2005. We took delivery
of
a fifth LNG carrier, the Al
Marrouna,
in
October 2006. As a result, our total calendar-ship-days increased by
3.4%.

Net
Revenues.
Net
revenues increased slightly to $103.5 million for 2006, from $102.4 million
for
2005, primarily due to:

·

an
increase of $2.4 million relating to the delivery of the Al
Marrouna
on
October 31, 2006; and

·

a
relative increase of $0.8 million in 2006 from 15.2 days of off-hire
for
one of our LNG carriers during February 2005,

partially
offset by

·

a
relative decrease of $2.4 million due to the Catalunya
Spirit
being off-hire for 35.5 days during 2006 resulting from a scheduled
drydock and cargo tank damages discovered while in drydock. The vessel
resumed normal operations in early July 2006.

We
have
reviewed the operating history of our other LNG carriers and we believe that
the
conditions that caused the damage to the cargo tanks on the Catalunya
Spirit
did not
occur on our other LNG carriers.

Vessel
Operating Expenses.
Vessel
operating expenses increased 8.5% to $18.9 million for 2006, from $17.4 million
for 2005, primarily due to:

·

an
increase of $1.2 million relating to higher insurance, service and
other
operating costs in 2006;

32

·

an
increase of $0.5 million from the cost of the repairs completed on
the
Catalunya
Spirit
during the second quarter of 2006 in excess of estimated insurance
recoveries; and

·

an
increase of $0.5 million relating to the delivery of the Al
Marrouna;

partially
offset by

·

a
decrease of $0.8 million primarily relating to repair and maintenance
work
completed on one of our LNG carriers during February
2005.

Depreciation
and Amortization.
Depreciation and amortization increased 5.1% to $33.2 million in 2006, from
$31.5 million in 2005, primarily due to:

·

an
increase of $1.0 million relating to the amortization of drydock
expenditures incurred during 2005 and 2006;
and

·

an
increase of $0.7 million relating to the delivery of the Al
Marrouna
on
October 31, 2006.

Depreciation
and amortization expense included $8.9 million in both 2006 and 2005 of
amortization of time-charter contracts acquired as part of the Teekay Spain
acquisition.

Spot
Tanker Segment

TCE
rates
for the vessels in our spot tanker segment primarily depend on oil production
and consumption levels, the number of vessels scrapped in the worldwide tanker
fleet, the number of newbuildings delivered and charterers' preference for
modern tankers. As a result of our significant dependence on the spot tanker
market, any fluctuations in TCE rates will affect our revenues and earnings.
Our
average TCE rate for the vessels in our spot tanker segment decreased 14.1%
to
$30,600 for 2006, from $32,357 for 2005.

The
following table outlines the TCE rates earned by the vessels in our spot tanker
segment for 2006, 2005 and 2004 and include the effect of FFAs, which we enter
into at times as hedges against a portion of our exposure to spot market rates.

2006

2005

2004

Vessel
Type

Net

Revenues

($000’s)

Revenue
Days

TCE
per Revenue Day

($)

Net

Revenues

($000’s)

Revenue
Days

TCE
per Revenue Day

($)

Net

Revenues

($000’s)

Revenue
Days

TCE
per Revenue Day

($)

VLCC

(85

)

-

-

8,347

90

92,744

67,129

876

76,631

Suezmax
(1)

56,981

1,639

34,766

68,395

1,862

36,732

122,412

2,374

51,564

Aframax
(2)

417,660

11,675

35,774

536,390

14,587

36,769

802,914

20,377

39,403

Oil/Bulk/Ore

-

-

-

-

-

-

3,269

150

21,793

Large
Product (3)

96,779

3,488

27,747

103,802

3,480

29,828

50,221

1,962

25,597

Small
Product

58,529

3,782

15,476

58,868

3,957

14,877

49,175

3,515

13,990

Totals

629,864

20,584

30,600

775,802

23,976

32,357

1,095,120

29,254

37,435

(1)

Results
for 2005 and 2004 for our Suezmax tankers include realized losses
from
FFAs of $3.0 million (or $1,630 per revenue day) and $11.3 million
(or
$4,757 per revenue day),
respectively.

(2)

Results
for 2006, 2005 and 2004 for our Aframax tankers include realized
losses
from FFAs of $2.6 million (or $220 per revenue day), $1.2 million
(or $84
per revenue day), and $10.5 million (or $513 per revenue day),
respectively.

(3)

Results
for 2005 for our large product tankers include realized gains from
FFAs of
$0.4 million (or $113 per revenue day). We did not enter into FFAs
for the
product tanker fleet prior to 2005.

The
following table provides a summary of the changes in calendar-ship-days by
owned
and chartered-in vessels for our spot tanker segment:

2006

(Calendar
Days)

2005

(Calendar
Days)

Percentage
Change

(%)

Owned
Vessels

9,541

10,733

(11.1

)

Chartered-in
Vessels

11,190

13,552

(17.4

)

Total

20,731

24,285

(14.6

)

The
average fleet size of our spot tanker fleet decreased 14.6% from 24,285 calendar
days in 2005 to 20,731 calendar days in 2006, primarily due to:

·

the
sale of 13 older Aframax tankers and one older Suezmax tanker in
2005
(collectively, the Spot
Tanker Dispositions);

·

the
net decrease of the number of chartered-in vessels, primarily Aframax
tankers; and

·

the
Aframax Transfer and the VLCC
Transfer;

partially
offset by

·

the
delivery of one large product tanker in both 2006 and 2005, as well
as two
Aframax tankers in 2005 (collectively, the Spot
Tanker Deliveries).

33

Net
Revenues.
Net
revenues decreased 18.8% to $629.9 million for 2006, from $775.8 million for
2005, primarily due to:

·

a
decrease of $97.1 million from the reduction in the number of chartered-in
vessels and the reduction in our average TCE rates;

·

a
decrease of $54.1 million relating to the Spot Tanker Dispositions;
and

·

a
decrease of $17.8 million relating to the VLCC and Aframax Transfers;

partially
offset by

·

an
increase of $23.1 million relating to the Spot Tanker
Deliveries.

Vessel
Operating Expenses.
Vessel
operating expenses decreased 4.9% to $59.5 million for 2006, from $62.5 million
for 2005, primarily due to:

·

a
decrease of $8.4 million relating to the Spot Tanker Dispositions;
and

·

a
decrease of $1.7 million relating to the Aframax Transfer;

partially
offset by

·

an
increase of $4.5 million relating to the Spot Tanker Deliveries;
and

·

an
increase of $2.6 million due to increased repairs and maintenance
activities.

Time-Charter
Hire Expense.
Time-charter hire expense decreased 21.5% to $215.0 million for 2006, from
$273.7 million for 2005, primarily due to:

·

a
decrease of $56.5 million relating to the net decrease of the number
of
chartered-in vessels and a decrease of 4.9% in our average per day
time-charter hire expense to $19,213 per day for 2006, from $20,198
per
day for 2005; and

·

a
decrease of $2.2 million relating to the VLCC
Transfer.

Depreciation
and Amortization.
Depreciation and amortization expense decreased 5.3% to $52.2 million for 2006,
from $55.1 million for 2005, primarily due to:

·

a
decrease of $5.2 million relating to the Spot Tanker Dispositions;
and

·

a
decrease of $1.1 million relating to the Aframax
Transfer;

partially
offset by

·

an
increase of $3.4 million relating to Spot Tanker
Deliveries.

Drydock
amortization was $6.5 million during both 2006 and 2005.

Gain
on Sale of Vessels.
Gain on
sale of vessels for 2006 of $2.0 million primarily reflects amortization of
a
deferred gain on the sale and leaseback of three Aframax tankers in December
2003, partially offset by adjustments on vessels sold in 2005. Gain on sale
of
vessels for 2005 of $142.0 million included gains on the sale of the Spot Tanker
Dispositions and the sale of one newbuilding, as well as amortization of a
deferred gain on the sale and leaseback of the three Aframax tankers.

Restructuring
Charges.
We
incurred restructuring charges of $8.9 million for 2006 and $1.9 million for
2005 relating to the relocation of certain operational functions from our
Vancouver, Canada office to locations closer to where our customers are located
and to where our ships operate. We do not expect to incur any significant
additional restructuring costs in 2007 associated with this relocation
project.

Other
Operating Results

General
and Administrative Expenses.
General
and administrative expenses increased 11.4% to $177.9 million for 2006, from
$159.7 million for 2005, primarily due to:

·

an
increase of $12.1 million relating to our acquisition of Petrojarl
in
October 2006,

·

an
increase of $9.0 million relating to employee stock option compensation,
described in further detail below;

·

an
increase of $7.5 million from the depreciation of the U.S. Dollar
from
corresponding 2005 levels relative to other currencies in which we
pay
certain general and administrative expenses;
and

a
relative decrease of $3.3 million during 2006 from expenses relating
to
the grant of 0.6 million restricted stock units to employees in March
2005
(please read Item 18 - Financial Statements: Note 13 - Capital
Stock).

Effective
January 1, 2006, we adopted the fair value recognition provisions of the
Financial Accounting Standards Board Statement No. 123(R), “Share-Based
Payment,” using the “modified prospective” method. Under this transition method,
compensation cost is recognized in our financial statements beginning with
the
effective date for all share-based payments granted after January 1, 2006 and
for all awards granted to employees prior to, but not yet vested as of January
1, 2006. Accordingly, prior period amounts have not been restated. During 2006,
we recognized $9.0 million of employee stock option compensation expense. As
of
December 31, 2006, there was $11.9 million of total unrecognized compensation
cost related to nonvested outstanding stock options. Recognition of this
compensation is expected to be $7.1 million (2007), $4.1 million (2008) and
$0.7
million (2009). Please read Item 18 - Financial Statements: Note 13 - Capital
Stock.

Interest
Expense.
Interest
expense increased 29.6% to $171.6 million for 2006, from $132.4 million for
2005, primarily due to:

·

an
increase of $21.4 million from interest-bearing debt of Teekay Nakilat,
which interest was capitalized prior to the January 2006 sale and
leaseback of three LNG carriers under
construction;

·

an
increase of $17.2 million resulting from the interest
incurred from financing our acquisition of Petrojarl and interest
incurred
on debt we assumed from Petrojarl;

·

an
increase of $8.7 million resulting from an increase in interest rates
applicable to our floating-rate
debt;

partially
offset by

·

a
decrease of $7.6 million from
the conversion of our 7.25% Premium Equity Participating Security
Units
into shares of our common stock in February
2006;

Interest
Income.
Interest
income increased 65.6% to $56.2 million for 2006, compared to $33.9 million
for
2005, primarily due to:

·

an
increase of $19.8 million, relating to additional restricted cash
deposits
which were primarily funded with the proceeds from the sale and leaseback
of three LNG carriers during January 2006;
and

·

an
increase of $5.5 million from an increase in interest rate we earned
on
our average outstanding cash balances;

partially
offset by

·

a
decrease of $3.7 million resulting from scheduled capital lease repayments
on two of our LNG carriers which were funded from restricted cash
deposits.

Equity
Income From Joint Ventures.
Equity
income from joint ventures was $5.9 million for 2006, compared to $11.1 million
for 2005, primarily due to a decrease in earnings from our 50% share in Skaugen
Petrotrans,which
provides lightering services primarily in the Gulf of Mexico. Skaugen Petrotrans
earnings decreases primarily due to higher in-chartering costs during
2006.

Foreign
Exchange Gains (Losses).
Foreign
exchange losses were $45.4 million in 2006 compared to foreign exchange gains
of
$59.8 million in 2005. Most of our foreign currency gains or losses are
attributable to the revaluation of our Euro-denominated term loans at the end
of
each period for
financial reporting purposes, and substantially all of the gains or losses
are
unrealized. Gains reflect a stronger U.S. Dollar against the Euro on the date
of
revaluation. Losses reflect a weaker U.S. Dollar against the Euro on the date
of
revaluation. As of the date of this report, our Euro-denominated revenues
generally approximate our Euro-denominated operating expenses and our
Euro-denominated interest and principal repayments.

Other
Loss.
Other
loss of $6.2 million for 2006 was primarily comprised of income tax expense
of
$7.9 million, loss on expiry of options to construct LNG carriers of $6.1
million, writeoff of capitalized loan costs of $2.8 million, minority interest
expense of $0.4 million and loss on bond redemption of $0.4 million, partially
offset by leasing income of $11.4 million from our volatile organic compound
emissions equipment.

Other
loss of $33.3 million for 2005 was primarily comprised of minority interest
expense of $16.6 million, a $13.3 million loss on bond redemption, a $7.8
million loss from settlement of in